Reply to Ultra high net worth and how much to leave to kids

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[quote=Anonymous][quote=Anonymous]Guess I am poor but what is “partial interest games”?[/quote]

Op here. We have a variety of assets. Currently we could each leave up to roughly $12M to the kids. We have roughly $38M so $16M would be subject to tax, which starts at 45% and goes up from there. With some advance planning we could drastically minimize the tax.

One of our assets is a strip mall worth maybe $3M. We could transfer the strip mall to our kids and use up $3M of our $24M limit.

But we could more intelligently sell them the strip mall for $3M and carry back a mortgage for the $3M. The IRS puts out minimum interest rates on a monthly basis. During the pandemic this rate was below 1%. Currently it is 3.72% on long term interest rates. In other words we could sell them the property at market value and lend to the them to purchase it at effectively below market value. We’d lock in the purchase price and they’d keep the cash flow. We’d still get the mortgage payments.

But this strategy can be maximized if we don’t sell them the whole property. The property is owned by an llc. We could structure the operating agreement such that a minority member has basically no rights. Because it has no right it is worth less than its corresponding percentage. For example we transfer them a 49% minority interest, which in paper should be worth just under $1.5M but because it had no rights we could get a legit appraisal likely appraising it for a discounted value, say $1.1M.

We can still lend them in the $1.1M at 3.72%. We’ve actually moved $400K of extra value plus given them a no brainer loan that for all intents and purposes over 15 to 20 years becomes a gift of half a property using none of our exemption.

We can repeat this exercise for any company we own, albeit a company that owns property or another business. For a business the discount can likely be greater.  We own some minority interests in businesses and some illiquid stocks. I expect that these are probably worth $5M today but unsellable today. The discount would be significant. Probably at least 50%. We could make a loan to them non recourse with a balloon payment meaning that they would only have to pay it back if the investment turned out good.

Related strategies can be used for grantor trusts that effectively allow us to transfer assets to the kids and a discount to actual value today.

The only catch is that we need to have time for them to truly maximize.  We are in our 40s. We have the time. [/quote]

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