How deferred interest donations can save on future estate taxes


The name of the game in private equity is interest. Successful transactions generate interest, which can create considerable wealth for private equity professionals. However, it can also lead to significant future taxes that most don’t think about – inheritance taxes.

One of the most important strategies to consider when reducing estate taxes is donating deferred interest early in a fund’s life to allow that interest to grow outside the estate.

When transferring a portion of the deferred interest in an irrevocable trust outside of the estate, the value and future growth are no longer subject to federal and state property taxes. This is particularly beneficial for reducing a family’s overall estate tax and avoiding the 40% estate tax rates currently in effect at the federal level.

While estate planning isn’t always the most fun topic to consider, there are several compelling reasons to consider doing it now. Consider that:

  1. A successful career in private equity today could lead to a significant inheritance tax problem in the future, especially if there is a state inheritance tax.
  2. The earlier the donation is made, the more the value of the deferred interest will be greatly reduced (and the lower the taxes you will pay today or the exemption you will use).
  3. The current exemption from inheritance tax is $ 11,700,000 for individuals (or $ 23,400,000 per married couple), which will expire in 2026. New tax proposals could reduce this figure to 5,000,000 $ – $ 7,000,000 per person – and even if no changes are made, in 2026 the exemption will return to its 2017 level of $ 5,490,000 per person ($ 10,980,000 per married couple). It is also possible that the inheritance tax rate will increase up to 45%.

Who should consider it and when?

If you are a private equity professional and believe there is a potential for an estate tax problem now or in the future, this strategy should be considered. It can happen at any stage of your career; However, the sooner you put the strategy in place, the more powerful it can be. And while it can be executed at almost any time, the best time to implement this strategy (and review it) is when you are fundraising, because that is when the interest is worth postponed may be the most discounted.

What’s the catch? One of the most common concerns about donating deferred interest is the fear of losing control over what assets you might need because the assets must be donated to an irrevocable trust. However, with the help of experienced professionals, strategies can be devised with the flexibility to have some of the interest going to the trust, while you keep the remaining interest. In fact, there are many ways to structure these strategies to provide the income you may need in the future, while still taking advantage of the exemption limits for donations.

If you fall into the camp of having a future inheritance tax, there are a few questions to consider: First, is this strategy right for you? Second, when and how much to offer? Third, how should you structure the contract and trust the flexibility you need in case life changes or the portfolio doesn’t perform as expected?

The deferred interest donation is a powerful tool that can help you maximize your wealth for future generations. And it can be a lot more flexible than you think if it’s structured in the right way.

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