Valuation Issues - Estate Freezes

Estate Freezes
An estate freeze is a planning tool that attempts to remove an appreciating asset from an estate, so the current asset's fair market value (FMV) is frozen to the estate of the current owner of the asset. It is an effective estate tax avoidance tool that allows highly appreciable assets to be transferred to younger family members, charities or trust vehicles.

Goals of the estate freeze:
1) Estate tax reduction, and
2) Retain enough wealth to meet his or her needs until death.

Corporate and Partnership RecapitalizationsSection 2701 of the United States Tax Code addresses the special rules used in the transfer of interests in corporations and partnerships, and how the gift tax is valued. The rules apply when interests are transferred to family and the receiving party retains an interest.

Recapitalization at the corporate level is an estate freezing technique for corporations whereas there are two classes of stocks issued: preferred and common. Since common stock is the appreciating stock class, these shares are given to the children and the owner retains the preferred stock.

Why Corporate Recapitalization?
The purpose is to limit the amount retained in the owner's estate to the low and unappreciated preferred stock. Any appreciation that occurs after the recapitalization and gifting of the common stock is associated with the common stock. Therefore, the owner effectively kept the appreciation out of their estate.

Recapitalization at the partnership level can be accomplished through the use of the family limited partnership (FLP) as a freezing tool. In forming the FLP, the originator acts as the general partner and then gives the limited partnership interests to other family members. As the limited partnership units are valued for gift tax purposes, they can be given discounts for lack of marketability and minority interest.

Result? Maintains family control over the asset and saves gift and estate taxes.

Transfers in Trust
Perhaps the most common estate freezing and transfer tool (next to gifting up to annual exemption amount) of gifting large amounts is the use of irrevocable trust transfers. By transferring highly appreciating assets at current market value out of the estate and into irrevocable trusts, the asset value is frozen at FMV at the date of the transfer and then is able to fully continue to appreciate while under the trust.

Transfers to GRATs and GRUTs
The grantor retains the right to receive a fixed or variable income stream from the trust at least annually, and usually for their lifetime and of their spouse.

Valuation Discounts for Business Interests
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