Sometimes estate planning works out for clients, and sometimes it doesn’t. A good estate plan will minimize the risk using several strategies. I recently filed an interesting estate tax return for a client called ‘Bob.’ Bob was a successful businessman who did a lot of estate planning, some of which worked out well for him and others did not.
Bob began an S-Corporation and built it up to a $2 million company at his death. However, Bob had no succession plan, so no one was trained to take over the business upon his death. Because of this, the company’s value dropped to $800,000 six months after his date of death. The company’s assets were sold for $150,000 a year after his death.
Because of this decline in value, we were able to elect to value the estate assets six months after Bob’s death, also called the alternative date of death. This saved on the amount of taxes paid, but the decline in value meant his family received less from his estate.
Bob also placed his home into a Qualified Personal Resident Trust or a QPRT for short. A QPRT is a type of trust you can place your home into for a certain number of years, and at the end of those years, the home will no longer belong to you or your estate. Bob, wanting to get the house out of his estate so he wouldn’t have to pay tax, put it in the QPRT in 2007 for five years. While this was a great estate planning technique, Bob died in 2012, just months shy of outliving the QPRT. This meant his house value was included in his estate return.
Bob was able to get a lot of money out of his estate by setting up Crummey Trusts for each of his kids and grandkids. A Crummey Trust is a type of trust that takes advantage of the annual gift exclusion. Every year since 2007, he gifted the annual amount to seven people and got $532,000 out of his estate.
Bob’s story is an excellent example of why it is so important to have an estate plan. For more information or an evaluation of your current estate plan, please call LSL CPAs & Business Advisors at (714) 569-1000.
By Suzanne Lieber
