Sometimes “Tax Planning” can be easy: “Open an IRA and it reduces your taxable income.” Other times it can be quite complex: “Cost segregation” on a building means hiring an engineering firm and having a structure broken down into its many components on paper, with each value separately listed; the frame, wiring, heating systems, etc., and taking write-offs, generally much faster than simply taking a standard approach. These are both ways to lower federal or state taxes.
For the people who have made large amounts of money or have larger estates, the year to year tax bill is not as much of a concern as the “Death Tax Bill.” Planning for them can be simple or complex as well, but the tax they are trying to avoid is the largest tax they will ever face and could collectively be more than all the annual federal taxes they ever paid during their entire lifetime (although technically, it will be their heirs who actually pay it, as they are deceased).
One such planning trick these people often use is to arrange legal ownership of their companies or assets so that it’s broken up into parts, then they can claim to the IRS that the parts have much less value then the whole, and gift those parts away while still living to trusts, children and other heirs.
Those steps look like this:
Take almost any kind of investment – a private company you own, a piece of real estate, a stock portfolio – and put it in an LLC or another legal entity.
Divide the LLC into pieces and spread it among your heirs, or trusts created on their behalf.
Claim that the combined value of the pieces is less than the value of the whole, because no one entity controls the entire investment. Some advisers insist that their client’s stake is worth 30% to 40% less than it would otherwise be, with bigger discounts for smaller stakes lacking voting power over the LLC.
Later – perhaps after you die – your family can get together and sell the entire asset on the open market and profit from its real, non-discounted value.
This works even for an LLC containing publicly traded shares that, if they hadn’t been locked up in the LLC, could easily have been sold off for their full value. Tax planning means different things to different people, with the goal of avoiding different kinds of taxes in different situations. But there is one constant, one thing across the board that’s true for everyone. If you haven’t hired a tax planner or a financial planner that is tax savvy, then you won’t know what’s possible and you might pay more than the folks who have engaged a planner.