Possible Proactive End of Year Tax Planning – Franchise and Excise Tax and Estate Tax – Two Things to Consider

At this time of year, people start to think about tax planning for next year. Here are two tax planning items some clients might want to consider doing before the end of the year. We know that people have many questions and concerns surrounding tax planning. Please review this and do not hesitate to contact MHPS if you have specific questions. 

Tennessee Franchise and Excise Tax

For Clients with an LLC for Their Business – Eliminating the Annual Payment of the Tennessee Franchise and Excise Tax – The State of Tennessee exacts a Franchise and Excise tax (“F&E tax”) on a limited liability company (”LLC”). The idea is that an LLC can protect a business owner’s other personal assets if the LLC is sued. In providing this protection, Tennessee makes the LLC pay an F&E tax each year. Unlike other taxes, such as an estate tax or capital gain tax, the F&E tax is paid each year. 

Under the law, the client can avoid paying the F&E tax each year, but to do so, the client needs to agree to allow his/her personal assets to become reachable by any of the LLC’s future creditors. Since that essentially defeats one of the primary purposes of having an LLC, the client rarely agrees to do this. Thus, he/she has no option but to pay the F&E tax every year. 

Instead, by using a special planning strategy, the client now has a way to eliminate paying the F&E tax each year. This is done by combining a specially designed trust with the LLC, such that (1) the F&E tax does not have to be paid, and (2) the client gets the same level of liability protection that the LLC provides. 

The catch is that the client has to complete this planning BEFORE the end of the year. Each year, we have clients call in January and February once they see their F&E tax bill for that year. They now want to do this planning, so they do not have to pay the tax for the year. But, it does not work that way. Once it is January 1, the client is obligated to pay the F&E tax for that year. Doing the planning in January will prevent the payment of the tax in the following year and each year after. But it will have no effect on eliminating the F&E tax in the current year. 

If you have clients with LLCs who might want to eliminate the F&E tax for 2021 and thereafter, they need to do the planning now before the end of the year. 

Possible Changes for the Estate Tax Exemption 

With the upcoming election, it is important to think about what tax changes might occur if the Democratic candidates win the Presidency and take control of the Senate. In looking at the Democratic Party platform, it identifies the estate tax exemption as one item for change. 

Currently, a single person can pass approximately $11,200,00 estate tax free, and a married couple can double that for approximately $22,400,000 estate tax free. The Democratic Party platform is to reduce the exemption amount to $3,500,00 estate tax free, and for a married couple, it would be $7,000,000 estate tax free. It is possible this reduction in the exemption would be retroactive to January 1, 2021. Therefore, if clients want to do planning and utilize the larger amount of estate tax free exemption, the planning needs to be completed before the end of the year.  

Additionally, as unsuccessfully attempted in 2016, they could attempt to eliminate one of the primary estate tax savings strategies referred to as Discounting and Freezing (which we will cover in an upcoming blog). These techniques are mostly beneficial to clients who have closely held businesses and/or real property that is not their personal house. Discounting and Freezing can save some clients thousands, if not millions, of estate tax. 

So, clients might be faced with the estate tax double whammy – a significant reduction in estate tax exemption, while at the same time losing one of the best strategies available for estate tax savings. 

This type of estate tax planning can take several weeks to complete. It is not something that can be done in a day or two. Clients who want to do this planning need to start as soon as possible if they have a concern that the estate tax exemption amount might be reduced. 

Depending on the election, clients who have enough wealth to be concerned about the possibility of the estate tax exemption being reduced from $11,200,000 to $3,500,000 should consider planning sooner rather than later, and definitely before the end of the year. 

Start Your Tax Planning Now

Many people wait until it’s too late to start thinking about their taxes. Getting an early start is extremely important, and now is the time to start planning for your upcoming taxes. 

Contact us today if you have any questions.

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