Julie Krieger Featured in Wall Street Journal on Wealth Transfer
When wealth is tied up in a family business, it can be hard to pass those assets to the next generation without Uncle Sam taking a big bite.
That was the dilemma Julie Krieger, a partner and wealth adviser at New York City-based Evercore Wealth Management, faced with her client.
The client was in his late 60s and had a net worth of $70 million – most of which was concentrated in his privately held retail business. He hoped to eventually pass on the business to his only child, an adult daughter, who was involved in running the company. To that end, she had already received gifts of more than $2 million in company stock from her father. But how could he pass along more of the company to his daughter without triggering a massive tax bill?
Ms. Krieger, whose firm has $3.6 billion under management and typically works with clients with at least $5 million in assets, saw an opportunity to take advantage of the $8 million in unused estate and gift-tax exemptions available to the client and his wife. After all, those unified exemption amounts are scheduled to change at year’s end.
“They’re likely to be much lower in 2013,” says Ms. Krieger, “so we recommended they use up their limits now.”
The plan was to transfer shares to the daughter through an irrevocable trust, giving as many as they could without triggering taxes. The first question was which shares to choose, because the company was made up of a series of S Corporations and limited liability companies.
Working with a team that included the company’s chief financial officer, accountant and attorney, Ms. Krieger realized that it made the most sense to gift shares of an entity with strong growth potential to the irrevocable trust. The reason: Any future appreciation inside the trust would be free from estate taxes, so the bigger the asset’s growth potential the bigger the potential tax savings.
“We chose an S Corp that was already one of the top performing entities, located in a suburb with a rapidly growing population,” says Ms. Krieger.
She recommended that the client put a majority of shares of that S Corp–which was valued at around $16 million–into the trust, and make his daughter both the trustee and the beneficiary.
The client liked the idea from a tax standpoint, but there was a problem: Giving the trust a majority of shares and making the daughter trustee would give her total control over the S Corp, and he wasn’t ready to cede control of any part of his company.
Ms. Krieger had a solution: make the gifted shares nonvoting shares. S Corps only allow one class of stock, but the owner can designate specific shares to be nonvoting. Even though the majority of the shares would be in the trust for the daughter, the client would retain a small portion of voting shares to retain control over the entity.
Another benefit: Ms. Krieger estimates the shares will receive a 30% valuation discount for tax purposes because of their nonvoting classification. What’s more, because the company’s shares are privately held, their valuation may also be discounted for what the Internal Revenue Service calls “lack of marketability.”
All told, the client will be able to put $13 million worth of shares into the trust, but Ms. Krieger estimates they will be valued at only $8 million for tax purposes. That means the client will use up but not exceed his and his wife’s remaining estate and gift-tax exemption.
The plan is in motion and the client intends to move the assets into the trust before the end of the year. If tax rates change as scheduled next year, the client will face an estate tax rate of 55%. “If he passes away in 2013 after we move the assets into the trust,” says Ms. Krieger, “I estimate we’ll have saved him over $7 million in taxes.”
– HARPER WILLIS
The Wall Street Journal
Evercore Wealth Management, LLC ("EWM") is an investment adviser registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. EWM prepared this material for informational purposes only and should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. It is not our intention to state or imply in any manner that past results are an indication of future performance. Future results cannot be guaranteed and a loss of principal may occur. This material does not constitute financial, investment, accounting, tax or legal advice. It does not constitute an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Specific needs of a client must be reviewed and assessed before determining the proper investment objective and asset allocation which may be adjusted to market circumstances. EWM may make investment decisions for its clients that are different from or inconsistent with the analysis in this report. EWM clients may invest in categories of securities or other instruments not covered in this report. Descriptions provided in this material are not substitutes for disclosure in offering documents for particular investment products. Any specific holdings discussed do not represent all of the securities purchased, sold or recommended by EWM, and the reader should not assume that investments in the companies identified and discussed were or will be profitable. Upon request, we will furnish a list of all securities recommended to clients during the past year. Performance results for individual accounts may vary due to the timing of investments, additions/withdrawals, length of relationship, and size of positions, among other reasons. Prospective investors should perform their own investigation and evaluation of investment options, should ask EWM for additional information if needed, and should consult their own attorney and other advisors. Indices are unmanaged and do not reflect fees or transaction expenses. You cannot invest directly in an index. References to benchmarks or indices are provided for information only. The securities discussed herein were holdings during the quarter. They will not always be the highest performing securities in the portfolio, but rather will have some characteristic of significance relevant to the article (e.g., reported news or event, a new contract, acquisition/divestiture, financing/refinancing, revenue or earnings, changes to management, change in relative valuation, plant strike, product recall, court ruling). EWM obtained this information from multiple sources believed to be reliable as of the date of publication; EWM, however, makes no representations as to the accuracy or completeness of such third party information. Unless otherwise noted, any recommendations, opinions and analysis herein reflect our judgment at the date of this report and are subject to change. EWM has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated, inaccurate, or incomplete. EWM’s Privacy Policy is available upon request. EWM is compensated for the investment advisory services it provides, generally based on a percentage of assets under management. In addition to the investment management fees charged, clients may be responsible for additional expenses, such as brokerage fees, custody fees, and fees and expenses charged by third-party mutual funds, pooled investment vehicles, and third-party managers that may be recommended to clients. A complete description of EWM’s advisory fees is available in Part 2A of EWM’s Form ADV. Trust services are provided by Evercore Trust Company, N.A., a national trust bank regulated by the Office of the Comptroller of the Currency and/or Evercore Trust Company of Delaware, a limited purpose trust company regulated by the Delaware State Bank Commissioner, both affiliates of EWM. Custody services are provided by Evercore Trust Company, N.A. The use of any word or phrase contained herein that could be considered superlative is not intended to imply that EWM is the only firm capable of providing adequate advisory services. This material does not purport to be a complete description of our investment services. This document is prepared for the use of EWM clients and prospective clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of EWM. Any unauthorized use or disclosure is prohibited. The Chartered Financial Analyst and CFA trademarks are the property of CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S.
IRS Circular 230 Disclosure:
Pursuant to IRS Regulations, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for (i) the purpose of avoiding IRS imposed penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. This information is provided for information purposes only and does not constitute financial, investment, tax or legal advice.
©2016 Evercore Wealth Management LLC. All rights reserved.
