Rare chance for wealthy families to avoid inheritance taxes



The economic conditions accompanying COVID-19 have created many avenues for change. As a law firm specializing in comprehensive estate and tax planning for high net worth investors, our imperative is to identify planning opportunities as they arise, even under current conditions.

The effects of the pandemic have led to a drop in the valuation of a significant number of companies, investment portfolios and real estate with limited holdings. To this end, there is a unique estate and tax planning opportunity called the Preferred Partnership Freeze (PPF) for those who wish to seize the opportunity offered by the current crisis. The Great Recession of 2008 created similar opportunities, and many of our valued customers seized the opportunity when it arose.

This PPF uniquely offers both inheritance tax savings while taking advantage of income tax laws. The overriding essence of the PPF captures the natural discounts associated with current low interest rates combined with the declining asset value created by the pandemic. Rarely does an estate tax planning technique allow both.

Assets that you expect to appreciate over the long term can be frozen at today’s lower valuations while shifting future appreciation into a dynastic trust for future generations over 365 years. For depreciable assets, such as rental property, the PPF combines the best of inheritance tax deferral from the “freeze” with the tax-free “step up in base” for the elimination of capital gains and increased depreciation for depreciable real estate.

How does the PPF work?

You identify assets that are expected to appreciate in value over time, which may include private companies, investment portfolios, and especially real estate with mortgages, and then contribute those assets to one or more companies. Limited Partnership (“LP”) which are established with two classes of Limited Partnership Holdings: 1) a class of preferred limited partnership shares; and 2) a class of LP common stock.

You keep the preferred shares of the limited partnership and then donate or sell some or all of the common shares of the limited partnership to a newly formed dynasty trust, such as our HYCET Trustâ„¢ (which stands for Have Your Cake and Eat It Too). This action freezes the current value (by the preferred stock of the limited partnership) while shifting the future appreciation to the common stock of the limited partnership that you transferred to the dynasty trust, which helps avoid inheritance taxes for future generations.

An example to show the strategy in action

To help put more emphasis on this strategy, let’s look at an example of how a family can put it into practice. A 70-year-old couple owns several commercial properties from which they earn rental income. They’ve engaged in a number of Sec 1031 tax-deferred swaps over the years, causing mortgages on properties to far exceed their “income tax” bases. They expect properties to continue to appreciate and would like to defer estate tax on appreciation for as long as this is permitted by “freezing the value” of the properties in the current estate. Finally, when they die, they do not want to lose the income tax-free “tax base adjustment” so that their heirs can benefit from a higher tax base for calculating the depreciation of rental property. thus reducing income tax on future rentals. Income. In short, they want to have their cake and eat it at.

Is it possible? Absolutely. Under current tax legislation, combining the benefits of partnership tax rules with generous inheritance and gift tax exemptions allows this couple to achieve both income tax and family tax savings. succession.

The bottom line

It is important to remember the bigger picture in the midst of this daily crisis. You may be aware that the generous lifetime exemption from federal estate tax of $ 11.58 million will be cut in half on January 1, 2026, and if there is a change at the White House in November, inheritance and gift tax exemptions could be repealed entirely or rolled back as tax rates rise. Plus, to help pay for the recent $ 2 trillion stimulus package, expect these generous gift and estate tax exemptions to be canceled long before 2026.

The bottom line is that this unique planning opportunity is unlikely to be available once we recover from the current crisis – so now is the time to come up with a plan of action, especially while you are crouching indoors. maybe with time and attention. to devote to this. And recover we go! Stay safe and stay healthy.

Managing Partner, Jeffrey M. Verdon Law Group, LLP

Jeffrey M. Verdon, Esq. is the managing partner of the Jeffrey M. Verdon Law Group, LLP, a law firm specializing in trusts and estates located in Newport Beach, California. With over 30 years of experience designing and implementing comprehensive estate planning and asset protection structures, the law firm serves affluent families and successful business owners to solve their most pressing issues. complex and most the goals and objectives of inheritance tax, income tax and asset protection.


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