Estate Tax Minimization & Liquidity Planning

Business owners and other high net worth individuals are very

interested in minimizing income taxes. They are motivated to create

wealth but often do not focus on estate planning which can help

preserve their legacy for the benefit of their families or favorite charities.

A recent study showed that of the high net worth individuals surveyed

(with assets from $5 million to $25 million) less than one-third have

an estate plan.

Absent new legislation, which is less likely in an election year, the expanded $5,120,000 lifetime gift exemption will revert

back to $1,000,000 after December 31, 2012 and the top estate tax rate will increase from 35% to 55%.

Many individuals have estates that would not be taxable at the 2012 exemption level or would have a larger part of their

estate subject to tax next year at a significantly higher rate.

Estate taxes can be minimized through a variety of simple and advanced techniques that effectively use the expanded

lifetime exemptions available this year. This requires quick but deliberate decisions and action steps so that the planning is

complete by year end.

Once the estate tax minimization planning is underway, a related but separate analysis should be performed to determine

how to best plan for the liquidity needed to pay the reduced estimated estate taxes.

Larger Estates are often composed of illiquid assets (e.g., residences, commercial & industrial real estate, businesses, etc.).

In addition to Federal estate taxes, other transfer costs due at death may require additional estate liquidity, [including or for

example]:

(1) Debts of the decedent;

(2) Probate costs & fees (if applicable);

(3) Administration fees (executor & trustees fees, Legal, Accounting, etc.);

(4) Decedent’s final income taxes; and

(5) State death taxes (if applicable).

There are six main sources available to generate funds to pay estate taxes. These are listed on the next page (including a general discussion of advantages and disadvantages of each). Please consult with your CBIZ tax advisor and your estate planning attorney to determine what actions are appropriate to achieve your specific goals and objectives, as each taxpayer’s situation should be evaluated individually.

CBIZ MHM, LLC

“…in this world nothing can be said to be certain, except death and taxes”Benjamin Franklin (November 13, 1789)

CBIZ Trusted Advisors with extensive experience are available to assist you with your estate planning needs. Please contact Stephen Kunkel at 310.268.2040 or skunkel@cbiz.com at CBIZ MHM, LLC for more information.

Fund Estate Tax Completely Or Partially With Life Insurance Proceeds

Sources Advantages Disadvantages

Sell Or Liquidate Estate Assets

Sinking Fund-accumulate Cash/Cash Equivalent Reserve In Advance Of Need

Borrow Estate Taxes From A Commercial Lender

Installment Payment Of Estate Tax On Business Assets

(If Estate Qualifies Under Irc Section 6166)

Estate Owned Corporation Shares Redeemed By Corporation (If Transaction Qualifies Under Section 303 Redemption

And Local State Law)

Liquidity Is Provided Exactly When Needed. Proceeds Payable At Death When Estate Tax

Becomes A Fixed Obligation. If Properly Structured, The Death Benefit Is Income Tax And

Estate Tax Free.

No Current Funding Obligation.

If Sufficient Liquid Funds Have Been Accumulated, There Would Be No Need To Liquidate Other

Assets Or Borrow Funds To Pay Estate Taxes When Due.

No Current Funding Obligation.

No Current Funding Obligation.

No Current Funding Obligation. If Qualified, Available Corporate Liquidity Can Be Used To

Redeem Stock Owned By The Estate To Provide Cash To Pay Taxes.

Requires A Current Obligation To Pay Life Insurance Premiums Which Are Typically Gifted

To An Irrevocable Life Insurance Trust (Ilit).

It May Be Necessary To Sell Illiquid Assets (Residence, Commercial Real Estate, Business Interests) At A Price Well Below Market Value To Be Able To Pay Estate Taxes When Due. Timing May Not Be Ideal To Sell Marketable Securities

(Bear Market/Bad Economy).

Accumulating A Lump Sum To Be Available At An Unknown Date In The Future Is Problematic. If Funds Are Accumulated Based On Life Expect-ancy There Would Be Insufficient Funds In The

Case Of A Premature Death. Current Returns On Cash/cash Equivalents Are At Historic Lows.

Continual Funding Obligation.

This Simply Replaces One Liability With Another. There Is No Guaranty That A Bank Will Be Willing

To Loan The Estate Sufficient Funds To Pay Estate Taxes Especially In Light Of The Estate Tax Lien On The Estate Assets. Future Interest Rates

Are Unknown.

Specific Requirements Must Be Met In Order To Make This Election. If Qualified, The Deferral Applies Only To The Estate Tax On Business Assets (Excludes Passive Assets). Includes

Restrictions On Sale Or Refinance Of Business. Other Liquidity Must Be Available For Personal

Assets (E.G. Residences, Marketable Securities & Non-qualified Businesses).

Redemption May Be Prohibited By Local State Law Limiting Amount Of Redemptions Based On Earned Surplus. Even If Allowable Under Tax And

Corporate Law Use Of Corporate Liquidity For This Purpose May Impact Corporate Working

Capital (E.G. During Bad Economy Or Period Of Limited Bank Lending Activity).

Planning For Estate Tax Liquidity