A wealthy family in California may be considering moves that can be taken to preserve family wealth from taxes with the advent of the new tax laws. There are mechanisms that can be used when reducing estate taxes. The current exemption of $11.18 million went into effect in 2018. This means that an estate valued at less than that is not subject to the federal estate tax.
One mechanism that wealthy families employ to reduce estate taxes is called a Family Limited Partnership, (FLP). An FLP allows a family to establish a partnership with family members and then gift to them shares in the partnership. For example, if someone invests in a real estate venture valued at $4 million and gives the FLP 90 percent of the value, it reduces the principal’s share by 90 percent, with the principal retaining a 10 percent interest. This also allows wealth to be transferred to another generation without incurring estate tax expenses.
The number of estates impacted by the estate tax has decreased as the exemption has increased. In 2000, the exemption was at $675,000 and approximately 52,000 estates were responsible for paying estate taxes. In 2017 the number was about 5,000. In 2018, the number that may need to pay the estate tax will be closer to 1,800.
A family in California who is considering their options regarding wealth protection and estate taxes may wish to seek the advice of an experienced estate planning attorney. A knowledgeable attorney will be familiar with the new tax law and the implications found therein. The lawyer can review the family’s financial situation and my be able to make recommendations further reducing estate taxes.