The risk, Tenenbaum notes, is that estates full of highly valued illiquid assets are hit with tax bills that force the sale of significant assets. That could mean the sale of certain stock positions, which might mean out on missed appreciation opportunities. Even the loss of some of the liquid securities portfolio would be easier to manage and arguably less damaging than the forced sale of all or part of a family business. Given how illiquid the market for privately held businesses is, and the relatively short deadlines for payment of these final taxes, there are risks of selling a core asset for less than it’s worth or being forced to sell that asset in its entirety.
That tax bill, Tenenbaum explains, must be paid by the estate before it is passed to the next generation. That said, the next generation can be leveraged to help mitigate the estate’s terminal liability. Business owners with sufficient assets could elect to do an estate freeze, which would freeze the growth on the value of the assets held in their name, and all additional asset growth would occur under someone else’s name, normally the next generation. The growth under the original owner’s name would still be taxed, but the subsequent growth would only be taxed when the next generation passes away, deferring a significant chunk of that terminal liability.
For advisors, the fact of these terminal liabilities presents a planning challenge. While planning for the disposition of liquid securities is relatively simple, complexities arise when clients own businesses. Often times, Tenenbaum notes, those businesses are real estate based and have assets that have both accumulated in value and lack liquidity. When those assets have been held for decades, the capital growth and resulting tax bills can be significant. Advisors, he argues, need to be aware of these holdings to know how to help plan for any resultant liquidity issues.
Tenenbaum believes that advisors can work to avoid these issues for their clients by taking a more holistic approach. He suggests that advisors develop a full understanding of these tax issues as they pertain to these clients. At the same time, they need to stay cognizant of where they are not qualified to comment or provide advice. Tenenbaum argues that a collaborative approach can help, as advisors work directly with their clients as well as their clients’ lawyers and tax planners to develop the best possible overall plan.
The advantage advisors have in these scenarios lies in the depth and scope of their client relationships. They have the capacity and longevity in relationships to get to know their clients and what their clients need. They can use that base to understand exactly what clients need, what they could benefit from, and what already exists in their estate plans.
