You’re planning to leave your hard-earned wealth to your children, but they’ll likely only see a piece of the money since the government is looking to cash in on the transfer.
We wanted to learn a little bit about what it takes to keep more money in the family and less in the government’s pockets, so we sat down with Joe Garza from Garza & Harris, Ltd. and talked about the right way to plan an estate.
Capital Press: Joe, can you tell us about an estate planning experience that stood out to you? Something where you were able to get a big win for your client?
Joe: There are actually two that come to mind. Both of these clients had children that were involved with companies they both owned, children that would one day take over these companies. While they were in similar situations, our firm planned their estates in two different ways based on other circumstances surrounding them. Our first client was able to transfer their company and funds to the children with almost no loss, while we hit some unexpected trouble with the second, but even they saved almost $6 million in estate tax.
Capital Press: Can you give us a few details about what you did for the first client you talked about? What were some of the goals you all had to work toward?
Joe: Sure, this client was very adamant about leaving money, not only to the children, but to charity as well. The client wanted a plan in place that would keep the company making donations throughout this whole process. They also wanted to make sure the children were ready to take over the company or that they were at least in the process of learning how to properly run things in all aspects.
Capital Press: And how did that affect your strategy?
Joe: Well, the company was actually going through a downturn at the time so we used that opportunity to gift just under half of the company through multiple grantor retained annuity trusts (GRATs) at a lower value. That valuation reflected substantial marketability and minority discounts because the minority shareholders couldn’t sell their shares and they had to abide by the management decisions of the majority shareholder. Also, the value of the shares was reduced by a contract under which the corporation had to pay fees to an affiliated company for management services while the children were still learning the ropes so to speak.
Capital Press: What about your client’s ambitions in charity?
Joe: The owner had a charitable lead annuity trust or CLAT, so when they died, the stock would be transferred to the CLAT, which would pay an annuity for a set number of years to a charity. That eliminated all estate tax that would normally be due on transferred property. In the end, our client retired and was able to transfer more than $100 million in stocks, virtually tax free.
Capital Press: That’s quite impressive. Now, you mentioned with the other client, you took a different route and ran into some issues? Do you care to dive into that a little for us?
Joe: This particular client was in poor mental health and had turned over power of attorney to a son. Again, the company was in decline so we used an “estate freeze technique”. We transferred an appreciating asset to an heir, where any appreciation after the fact totally escapes the gift tax. We also pushed for a sale to an IDGT, so the transferor is still the owner for income tax purposes and is taxed even after the transfer. But, for estate and gift tax purposes, it’s completely like the owner made an irrevocable transfer of ownership to that trust. Many details later, it really came down to the client passing on unexpectedly. We would’ve used a different plan if we had foreseen that. Nevertheless, even with owner’s unexpected passing, the sale to the IDGT saved almost $6 million in estate tax. The children actually now own equal stock in the company.
Capital Press: Joe, we can’t thank you enough for sitting down with us. Do you have any general advice you can share with us before you have to leave?
Joe: Sure, sure, let’s see. I’d say the most important thing would be to plan ahead. It’s never too late to call us, but the earlier you start any kind of wealth management or wealth retainment, the more options you have. Communication is key as well. There have to be constant updates on both sides for any changes like health problems, the possibility of divorce, a change in designated heirs, what have you.
Capital Press: That’s great advice. We will make sure to take heed. Well, thanks so much again, Joe. Have a great day and we’ll talk to you soon.
There you have it. Stories and solid advice from one of Dallas’s top financial lawyers. If you’re thinking of planning your estate and want to retain as much of your wealth as possible, consider getting solid financial advice. Doing things the right way pays off.