||In This Issue:
|| • Estate Planning for Business Owners and Their Families How Can I Minimize
ESTATE PLANNING FOR BUSINESS OWNERS AND THEIR FAMILIES
How Can I Minimize Estate Taxes?
In the realm of Exit Planning and Estate Planning
it can be important to understand what estate
taxes are, know the tools available to help
minimize them, and employ those tools to transfer
your estate (including your business) to the
“objects of your bounty” upon your death. To conclude this series of Exit Planning Navigator®
articles, we will focus on the last important area of
estate planning for business owners and their
families – strategies to help minimize estate taxes
when creating such a plan.
Before we jump into this important discussion,
let’s first define what an estate is. An estate, for
federal estate tax purposes, is everything you
own or control at death, including life insurance
proceeds and jointly owned property. The federal
government and most state governments impose
an estate tax when two conditions are present: (1)
you have departed this earth and (2) your estate
is in excess of the estate tax exemption amount
available in the year of death (somewhere
between $1 million and $3.5 million in the next
few years). So, how do you minimize your estate
taxes if you fall within these parameters?
First, you must make full use of the available
exemption equivalent amount that you can leave
at your death without paying taxes. This exclusion
is also available to your spouse. With proper
planning, a total estate of $2 million to $7 million
may pass to children without estate tax
consequences (depending on current estate tax
The marital deduction is the second primary
means to eliminate or reduce estate taxes. This is
a total deduction from taxation of all amounts
passing from a decedent to his or her spouse
(provided the spouse is a U.S. citizen), either as
gifts or at death. Even if your estate is worth $50
billion, if you leave everything to your spouse at
your death, there are no federal taxes, in most
We’re sure this sounds great to you, and it is,
at least at the time the first spouse dies. But
there’s a hidden trap. When the surviving
spouse also dies, there is no longer a marital
deduction on any property previously passed
to the surviving spouse because of the
marital deduction. The only “deduction” that
remains is the available exemption equivalent
amount. In this case, the entire estate tax
burden normally falls on the surviving
children. For an example of this scenario,
let’s take a look at the hypothetical case
study of DeWayne and Connie Smith.
An estate is everything you own
or control at death.
The Smiths, in their late thirties, had two
young children. Personal property and
investments totaled $700,000. Their business
was worth $5 million, the equity in their home
was $1,300,000, and they each had life
insurance of $1 million payable to each other.
Their total estate was valued at $9 million.
As their estate was initially structured, there
would be no taxes when the first spouse died
since the surviving spouse would receive
everything. However, when the surviving
spouse died, there would be estate taxes
between (approximately!) $1 million and $3.5
The couple’s Exit Planning Advisor explained
to the Smiths that the estate tax
consequence of not doing any further estate
planning was to pay significant estate taxes.
Both insisted; however, that if DeWayne died
first, Connie should receive the benefit of the
entire estate to satisfy her lifetime needs.
That was more important to them than saving
estate taxes. But, then their advisor explained
that it was possible for each of them to both
save taxes and accomplish that goal.
First, their Exit Planning Advisor recommended that
the joint tenancy on all of their assets be severed and
the assets be retitled so that each spouse owned
approximately $3.5 million of assets in his or her
name. The life insurance would be owned by an
irrevocable life insurance trust to keep the insurance
proceeds from being subject to estate taxes. One
caveat: It is important to work with an experienced
estate planning professional when doing this as there
can be a hidden trap ‘ “The Reciprocal Trust Doctrine”
– that must be avoided.
...estate planning is a process that continues throughout your lifetime.
The Smiths, after equalizing the estates, created wills
with trust provisions. (Living trusts work equally well.)
The effect of the planning was to transfer as much as
possible, without tax consequences, of the spouse’s
estate in a family trust for the benefit of the surviving
spouse and children. Accordingly, when the first
spouse died, (it made no difference who died first,
since their estates were equalized – a crucial planning
point), the estate exemption amount prevailing at the
first spouse’s death (between $1 million and $3.5
million, which varies with the year of death under our
current tax law) would go into a trust for the survivor.
The surviving spouse could receive all of the income
for the rest of his or her life and, as trustee, have
significant control over the use of the money in the
trust. Yet, for estate tax purposes, only the amount of
money owned in his or her name would be includable
in the estate when the surviving spouse died. This is
the case because the trust created at the death of the
first spouse was designed to place enough restrictions
on the right of the surviving spouse’s access so that
the IRS would not consider the amount in that trust to
be includable in the surviving spouse’s estate as well.
The net result? When the first spouse dies, there will be
no estate taxes. Instead, the exempt amount ($1 million to
$3.5 million) will go into a family trust. If the decedent
spouse owned more assets than the exempt amount, the
balance would go to the surviving spouse via a provision
in the will or trust document, and this amount would qualify
for the marital deduction. So, with proper planning, there is
no estate tax when the first spouse dies.
When the surviving spouse dies, estate tax is minimized or
eliminated (again, depending on year of death) because
the surviving spouse’s estate consisted of well less than
half of the original estate.
The type of trusts described in this case study can
continue for the benefit of the surviving children. The
remaining amounts were designed to be distributed to the
children at ages Connie and DeWayne deemed
appropriate, thereby meeting the couple’s estate planning
As we have seen in this Exit Planning Navigator® series
of articles, estate planning is a process that continues
throughout your lifetime. The degree of involvement – or
neglect – you pay to this process will be felt by your loved
ones long after you are gone. Thorough estate planning
should help accomplish these goals:
1. To provide for family income needs, especially
those of your spouse and dependent children,
after your death.
2. To minimize or eliminate estate taxes.
3. To fuel the growth of your estate outside of your
4. To provide for a fair, but not necessarily equal,
distribution of your estate among your children,
both during your lifetime and at death.
5. To preserve your assets from the claims of
creditors during your lifetime and at death.
6. To establish control and eventual ownership of
Subsequent issues of Exit Planning Navigator® discuss all aspects of Exit Planning. If you have any questions regarding the Exit Planning process, please contact Kevin Short, Managing Director (firstname.lastname@example.org).