Income Tax and Estate Planning Update

By Keiser, Laurence | The CPA Journal, July 2000 | Go to article overview

Income Tax and Estate Planning Update


Keiser, Laurence, The CPA Journal


With the effective repeal of all estate and gift taxes by New York State as of February 1, 2000, estate tax planning opportunities will involve only consideration of planning opportunities to avoid federal transfer taxes. The same planning can be used for all "pick-up" states.

We recently advised a number of clients on the sale (as opposed to gifting) of business interests to their children in consideration of a long-term promissory note funded with salaries and bonuses that otherwise would have gone to the parents. In other words, one or more children would receive the earnings that otherwise would have been paid to the parents, which in turn they pay to the parents for the S corporation or C corporation stock pursuant to an installment sale agreement with treatment at the lower capital gains rates. This puts the parents in basically the same cash flow position that they had while working, perhaps even better, because of the lower tax rate. In some cases, the parents have relocated to Florida and changed their domicile before the sale documents are executed, thereby avoiding New York State income tax on the payments. This is not possible if the clients relocate after the documents are signed because such a move out of state will accelerate the capital gains tax to New York (unless a bond is posted, which is rarely done).

With older clients, a sale of stock or real estate may involve a private annuity, a self-- canceling installment note (SCIN), or a sale to a defective grantor trust. These tax planning techniques may be combined with others, including

* family limited partnerships

* qualified personal residence trusts

* charitable remainder/lead trusts

* grantor retained annuity trusts. Taxpayers and their advisors should determine which technique is best suited to the particular financial and family situation. The point to remember is that estate taxes are to a certain extent voluntary-those who fail to plan have no opportunity to avoid what can be an extremely heavy burden on the family. It should be noted that the President's tax proposals call for the prospective (not retroactive) repeal of the personal residence trust gifting technique, which is all the more reason for prompt action.

Discounts in Valuations

A great deal of emphasis today is being placed on the use of discounts in valuing partnership and closely held business interests for such things as lack of marketability, minority interest, lack of liquidity, a bundling of assets, and builtin gain. …

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