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Estate Planning: Not Just for Attorneys. Tim Ulen of PP&Co Explains



Eric: Hey, everyone, this is Eric Sundheim with Mercovus Valuations. I'm pleased to be in PP&Co’s office today, joined by Mr. Tim Ulen.

 

Tim: Thank you, Eric. Thanks for coming.

 

Eric: So, Tim, why don't you introduce yourself to everyone and tell them about your firm?

 

Tim: Okay. My name is Tim Ulen. I'm a tax partner at PP&Co. I advise private business owners and high-net-worth individuals on tax strategies. I run our firm’s real estate practice group, so many of my clients are real estate developers and investors.

 

PP&Co is a full-service accounting firm. You're in our main office here today in downtown San Jose. We also have a satellite office over the hill in Santa Cruz and one in Portland, Oregon.

 

Eric: It's a beautiful space. We're looking right over... this is 87.

 

Tim: That's right.

 

Eric: And we've got SAP Center right behind us.

 

Tim and I have worked together in the past concerning estate planning. I think when a lot of people think about estate planning, they assume it involves only attorneys, but certainly, CPAs and appraisers get involved too. So, when does estate planning become relevant for you?

 

Tim: Good question. Well, certainly clients who are pushing the estate tax limits – the exemption amount – need estate planning because they could be subject to estate tax. But really, we feel that everyone should have a basic estate plan—whether that's a will, a trust, or life insurance—just to make sure that that their assets pass according to their wishes if something were to happen.

 

Eric: You want to avoid probate at all costs. Do you want to briefly explain probate for people at home? This is important even if you're under the estate tax exemption—sometimes called the "death tax," a term coined by Frank Luntz, whom I actually met in D.C. when I was in high school. What is that exemption, and how does probate work?

 

Tim: Well, currently, thanks to the Tax Cuts and Jobs Act of 2017, we're currently looking at historically high estate tax exemptions. I think it's $13.61 million for 2024 for an individual.

 

Eric: It's inflation adjusted, so it changes.

 

Tim: That's right. So, for a family, you're almost at $28 million. It's a pretty high number, so fewer people are subject to estate taxes right now. However, like many provisions of the Tax Cuts and Jobs Act, the enhanced estate tax exemption is set to expire at the end of 2025, which would cut that number in half, making it relevant to many more people.

 

Eric: Absolutely. It will sunset, and we don't know what that number will be in the future, so it makes planning difficult. Should I plan as if I'll be affected by the death tax, or will I be exempt?

 

Tim: That’s right. And the probate question, I'm not an expert by any means, but if an estate goes through probate, it generally means the court will decide what happens with your assets, rather than you. That may not agree with your wishes, which is why having a trust or will is important to outline where you want your assets to go.

 

Eric: Or even if it does agree, it will still take time.

 

Tim: That’s right.

 

Eric: And any process with the government will be lengthy and costly. So, if you can put your assets into a trust, you can bypass that whole probate process. I'm not a probate expert either, but I do know it's something you don't want to go through, nor do you want your heirs to go through it. Pretty much anyone with assets should have a will, a trust, and a power of attorney set up in case something bad happens. This will make things easier for both you and your family in the event of your passing or disability. There’s also more advanced estate planning where we get beyond the attorneys, and the accountants and valuation professionals get involved.

 

So, let's talk about someone who has died and owned a fractional interest in a property or a business. Even if it's below the estate tax exemption, what’s been your involvement with that?

 

Tim: Okay. Most of our clients own private interests in businesses or real estate, and, in many cases, that’s the main source of their wealth. When they pass away, they could fall into one of two categories. We would involve someone like you to value those assets to determine the value of their gross estate. Depending on that value, they might need to file an estate tax return, or they might not, but it's crucial to understand the value and how to support it.

 

Eric: Got it. So, 706 is another term for the estate tax return. And, if the person is dead, who’s filing it?

 

Tim: Typically, there's an administrator or an executor of their estate who helps gather the assets and works with their advisors. Sometimes attorneys file the estate tax return, but more often than not, they look to us to file it on their behalf.

 

Eric: Got it. So, now the estate is technically your client rather than the individual.

 

Tim: That's right. And at that point, we work closely with the administrator or executor of the estate, usually pretty closely with an attorney who helped design the estate plan over time as they’re familiar with how they expected things to play out.

 

Eric: Okay. So that's the beginning and intermediate. If we're talking about a very wealthy client who will undoubtedly exceed the exemption, how do you help them plan to possibly avoid the estate tax?

 

Tim: As I mentioned, many of our clients are private business owners or real estate investors, and those assets have grown over time. A pretty common estate planning strategy is to give minority interests in those assets to family members, either through trusts or family partnerships over time, for a number of reasons. This can transfer assets with a discount, allowing them to appreciate outside of the estate. However, it’s important to note that when these transfers occur, or at death, the assets need to be valued properly. They can be discounted for lack of control or marketability. If these need to be disclosed on a gift tax return, and it's really important to work with someone like you to do that properly.

 

Eric: And that's because even though you're not dead yet, you're still using up your lifetime exemption based on today's value. What Tim is talking about in terms of these discounts is that if you have a $100 million business, you could give 10% of that to your child now, and that 10% might be worth less than $10 million because of these discounts. It’s a fractional interest. So, it might be worth $7 million based on these discounts of lack of control and marketability. You can reduce your estate tax both that way and by using the value today versus the value when you pass, which is presumably going to be higher.

 

Tim: Exactly. There's an important IRS rule called the adequate disclosure requirement for lifetime gifting. It basically says that, if you file a gift tax return and it’s adequately disclosed, after the statute of limitations for that gift tax has passed, the IRS can't come in and challenge the value of the gift as reported on the return. There’s a lot of things that need to be reported to meet the adequate disclosure requirement, but one of the main things is a proper valuation with the correct language and methodology attached to the gift tax return. That’s where working with someone like you as well.

 

Eric: Perfect. So, that’s where things start to get complicated. If you have more questions about this issue, please reach out to Tim or me. We'd be happy to assist you and connect you with estate planning attorneys who can also help with these matters.

 

Again, I'm Eric Sundheim with Mercovus Valuations.

 

Tim: Tim Ulen, PP&Co. Thanks, Eric.

 

Eric: Thanks so much.

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