Negative Market Can Be Positive For Wealth Transfer

Fort Worth Business Press - May 4-10, 2009

 

Dark market days may in fact have a hidden silver lining. Economic challenges and tax law changes actually can create a rich environment for estate planning.

This is because the general decline in the value of investment assets, businesses and real property provide ideal timing to transfer those assets into a trust or to friends, family or key employees. The transfer is treated as a gift or as a compensation at its Fair Market Value on the date of transfer. Therefore, you can transfer a devalued asset today resulting in a lower "charge" against your lifetime tax exclusion or a lower compensation amount to that key employee.

Then tomorrow, when the asset has re-attained its true value, it is now in the hands of the transferee. The result is that you have, in effect, transferred wealth or business value at a discount.

First, if you're thinking of transferring wealth to your children or grandchildren to minimize future tax liability, remember that there are limits as to what can be transferred tax free. Review your family estate plan to examine opportunities for tax savings, further enhanced by today's estate planning tax laws.

For example:

• The annual federal gift tax exclusion has risen to $13,000 from $12,000 per recipient. Annual exclusion gifts make it so that a donor can transfer wealth to any family member or any friend every year. If an asset has a lower value today, it will increase in their account in the future, giving a greater value to the recipient in the future.
 
• The federal estate tax exemption has grown from $2 million to $3.5 million, quite an increase. This makes it so that families can transfer more assets without estate tax liability in a more streamlined estate plan. Remember, the maximum benefit from the estate tax exemption for husband and wife may require careful allocation of assets. And, you'll want to consider ways for both spouses to use the estate tax exemptions. It's the largest increase in the federal estate tax exemption in history and it in effect through 2009.
 
• Under the structure of estate tax law now in effect, no federal estate tax is due if one dies in 2010. In 2011, the tax comes back into effect with a much lower exemption of $1 million. At that time, the maximum tax rate of 55 percent is again in force. Interestingly, the new administration in Washington apparently wants to continue the $3.5 million exemption indefinitely at a maximum tax rate of 45 percent. However, further reductions of estate tax rates or increases in exemptions are unlikely. There will most likely continue to be a federal estate tax, so why not move now to reduce potential estate tax liabilities?
 
• Intra-family loans might be good to think about, as well. You can prepare or restructure a loan at very low interest rates to meet needs. The rules are that the interest rate in an intra-family loan must be comparable to market interest rates. Market rates are at an all time low right now, so it's an ideal time to consider this strategy if it suits your financial planning desires.
 
• As far as transferring assets to a trust, consider a qualified personal residence trust. This is a deferred gift technique for a primary residence, house or condominium. It could be a great idea this year, in this era of deeply reduced real estate values. For business owners, the time is ripe, as well. If you are ready to transfer ownership as a part of your succession plan, do it this year as the value of your business may be reduced due to economic conditions. Temporary devaluations are in fact valuable.
 
• If transferring to a family non-employee, this will be a gift and subject to gift tax rules. The gift will be valued at a discounted rate.
 
• If you're transferring to a key employee, it will be considered additional compensation. Such compensation is taxed as income to the employee and becomes a deduction for the company. The tax will be less as the company value may be less in this environment - a benefit to the recipient.
 
• If you're transferring a minority interest, it will be further decreased due to minority interest discounts and, if a private organization, further discounts owing to lack of marketability.
 
• Finally, for most qualified retirement plans and individual retirement accounts, remember that during 2009, people who have reached age 70 1/2 no longer have to take a minimum distribution from retirement savings. There is also an opportunity for those age 70 1/2 to roll over a portion of their IRAs directly to charities - up to $100,000 per year.
 

Whatever your strategy, the issues are complicated. It's a good time to think and rethink the various openings in a seemingly cloudy economic climate and find your best silver lining.

Certified Public Accountant Allyson Baumeister is an officer and partner at Sanford, Baumeister, & Frazier, PLLC. Allyson works tirelessly for businesses of all sizes, maintaining a primary focus on specialized personal and business tax and consulting by providing clients with creative resolutions for technical tax issues. She excels at clearly interpreting proposed and existing tax laws and delineating applicable impact of new ones. She actively participates in the Council and PCPS Executive Committee of the American Institute of CPAs, Strategic Planning Committee of the Texas Society of CPAs, Fort Worth Chamber of Commerce, and the Aledo community she calls home.