Tuesday, May 9, 2017

Stage 2 Planning: Maximizing How Much Can Be Given?

In this week’s blog post, we discuss the continued historical emphasis on financial planning and the development of "stage 2 planning™" strategies designed to minimize estate and gift taxes.

For most of its history, the United States did not generate revenue by taxing transfers of wealth, whether made during one’s lifetime or upon death. That changed in 1916 when the federal government enacted an estate tax, and to address a planning “loophole,” it added a gift tax in 1932. Even today, the IRS continues to modify the tax code, seeking to close other “loopholes” utilized by crafty planners. As a result, different families in similar circumstances often pay different taxes, depending upon the extent to which they take advantage of creative planning opportunities.

Over time, these laws created an incentive for families in business together to engage in (and, perhaps, disproportionately focus on) planning exercises designed to reduce, if not eliminate, such taxes. Because estate and gift tax planning requires a high degree of technical competence, especially when assets (or an estate) consist largely of a family-owned business and the tax laws keep changing, many family business owners have—understandably—sought the help of attorneys and other professionals to navigate these laws and develop strategies to preserve wealth.

While planning to minimize otherwise applicable taxes serves a purpose, an accumulating body of data suggests that only a very limited percentage of family business failures are attributable to estate and tax planning (i.e. “stage 1 planning™” and “stage 2 planning™”) but, instead, that most failures are more appropriately attributable to a lack of “people planning”. These considerations generally received inadequate attention until sometime in the 1970s when the field of family business consulting is traditionally considered to have been established. We refer to this work as “stage 3 planning™”, which we turn to in next week’s blog.


Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to "Stage 4 Planning" Strategies, 65 Buff. L. Rev. (forthcoming May 2017).

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