Multigenerational Estate Planning in Times of Anticipated Change
The estate planning community has benefited from low interest rates, initially coupled with low asset values, for nearly a decade. During this period, many families took advantage of tax incentives to transfer both wealth and ultimate control of those assets to younger generations, while ensuring that the older generation still enjoyed sufficient income.
The economic and tax factors that encouraged families and non-family groups to engage in this type of planning still exist, and so do various techniques that accomplish a broad range of tax, financial, and family objectives.
One popular option is a freeze partnership, which enables a senior generation to “freeze” the value of its economic interests in the business assets, with future appreciation and risks of ownership typically held in trust for the next generation, so that substantially all future capital appreciation of those assets will be exempt from estate tax.
Classes of Interest
Parties to a freeze partnership typically have one of two classes of interest: preferred and common. In a traditional freeze partnership, the senior generation will contribute its ownership interest as a preferred interest. A professional appraiser determines the preferred interest value, along with a rate of return that will pay fixed, cumulative, annual returns, and a liquidation preference. The remaining common membership interest—the younger generation—is entitled to any future capital appreciation in the value of the business, as well as profits above and beyond the preferred rate of return on the preferred interest that the senior generation holds.