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Don’t Let Your Estate Plan Fall Prey to These Deadly Tax Issues


While there are a number of tax issues that can cause serious problems for your estate plans, there are several in particular that are worth elaborating on in order to ensure that you are prepared for your annual checkup with your estate planning attorney and any other advisers you have.

Family Limited Partnerships and Limited Liability Companies

If your estate plan includes family limited partnerships and limited liability companies, there are a number of complications that can come about. Some families choose to form these entities in order to hold business assets and family investments; while also taking advantage of valuation discounts; especially for gift tax purposes. Many were interested in them in particular because parents can hold investments and continue to control the entity even if they give away some or most of the interests. They also provide a certain amount of asset protection, particularly if a family member who owns an interest gets sued. In this instance, any claimant is going to be very limited in what they can access.

However, that doesn’t mean family limited partnerships and limited liability companies do not have their own issues. In particular, if they are not properly maintained, all of their benefits can disappear because they have such strict requirements associated with them. For example, if personal assets are purposely or accidentally commingled with entity assets, the IRS will likely disregard the asset protection benefits. In addition, any improper legal transfer of assets can also cause the entity to be disregarded. Therefore, the internal administrative documentation and the operation of these entities needs to be regularly reviewed.

Because the estate tax exemption has increased so much since these tax-saving strategies were  first developed, the gift or estate tax that they were created to avoid is no longer necessarily  an issue and, in fact, might even be a tax detriment. While this may tempt some into dissolving the entities, be careful, as transfer tax changes could soon change, making them, once again, beneficial to have in place.

In a nutshell, if you have one of these entities in your estate plan, make sure that you meet with your advisor team fairly regularly in order to ensure that everything is on track and you’re still getting the benefits and meeting goals that you originally envisioned. Sometimes even making minor changes can really help get you back on the right track; but this requires review.

Irrevocable Trusts & Swap Powers

Many people do not realize that irrevocable trusts may include swap powers. A swap power basically means that settlor has the power to swap or substitute personal assets for trust assets of equal value.  Assets held in an irrevocable trust to not get a stepped-up basis when the settlor of the trust dies. If an irrevocable trust holds greatly appreciated assets, a settlor may want to empoy an asset swap so that the appreciated assets acquire a stepped-up basis on the death of the settlor.

However, swap powers need to be closely watched. If they are not, there could be some serious income tax consequences. If you have an irrevocable trust in your estate, you and your trustee should keep a constant watch on any swap powers that exist and review the trust assets every year. Any financial advisers that you retain should also keep a close eye on the account, and that includes your attorneys in order to ensure that all transactions are done in accordance with the law. Also be sure that your accountant and advisors are always made aware of these transactions so that everything can be properly reported on tax returns.

Selecting A Jurisdiction For Your Trust

Another important thing to keep in mind is that if you have a trust, you can choose a better place to locate that trust in order to take advantage of the best state income taxes and ensure that you have chosen the best environment for your trust. The reality is that some areas are simply going to be more beneficial to you when it comes to what you get out of your trust.

Contact Our Florida Wills & Probate Attorneys

It is the job of your estate planning attorney to ensure that they discuss all of these various topics and decisions when it comes to your trust. Contact our experienced Sarasota wills and probate attorneys at Suncoast Civil Law today to find how we can best provide you with legal guidance.