“Last Chance” Tax Planning & Family Legacy Planning—It’s Not “Either/Or.” It’s BOTH.

When The Blum Firm embarked on this Family Legacy Planning series several months ago, we described this new dimension of our practice as bringing both “head” and “heart” to the estate planning process. The key to holistic estate planning is to consider both “quantitative” and “qualitative” concepts and merge them into an estate plan. In the spirit of recognizing the marriage of these “soft” and “hard” issues, we want to focus on how to address family legacy planning during today’s hot legislative climate. We can’t ignore the fact that this family legacy conversation is happening during a time of potential tax law upheaval.

As we study the proposed tax changes in the American Families Plan and Senate bills known as the “For the 99.5% Act” and the “STEP Act,” we become aware of the urgent need to get out in front of these proposed changes. We read daily articles urging the wise to engage in “last chance” tax planning or else wake up with regret in January 2022. We need to pay attention to these warnings and take action, but do so thoughtfully, in a way that blends head and heart. Now is the chance to create a multi-generational estate plan to help set up future generations for success.

The estate and gift tax exemption is at an all-time high of $11.7 million, but legislation threatens to drop to the estate tax exemption to $3.5 million and the gift tax exemption to $1.0 million. It’s a “use it or lose it” situation. By using “squeeze & freeze” techniques that are currently available but now on the chopping block, you can remove far more than $11.7 million from your estate. For example, a married couple can transfer $36 million of assets to a Family Limited Partnership, where the discounted fair market value of the FLP units may be $23.4 million (after a 35% valuation discount). After gifting those FLP units to trusts, the couple can sell additional FLP units with a value of $150 million to grantor trusts and carry a note, shifting all the future appreciation on the assets out of the estate. Here’s the urgency: you can lock in the current exemption and grandfather the “squeeze & freeze” techniques used, as long as you complete your planning before the law passes.

Now may be the last chance to achieve this kind of wealth shift without having to pay income tax, estate tax, or gift tax. When you use creative tools like SLATs, DGTs, 678 Trusts (or BDITs), and GRATs, you not only get assets out of your estate, but you can carefully design the plan so you continue to have access to assets, control over investment decisions, and flexibility. That’s the “head” part. Now here comes the “heart” part. You can create a structure that includes future generations and begins training them to become responsible inheritors. You can build into the plan family governance procedures to teach heirs about philanthropy, entrepreneurship, family heritage, and values. After Generation 1 passes away, the assets continue in trusts designed with mentoring opportunities to continue educating and empowering future generations.

The ultimate merging of head and heart comes in the creation of a FAST (Family Advancement Sustainability Trust), a trust that endows the process of family meetings and covers the cost of preparing heirs. Now is the ideal time to use the $11.7 million exemption to fund a FAST. In next week’s email, we’ll dive deeper into the FAST solution to Family Legacy Planning.

Marvin E. Blum