The Exuberant Accountant - Scott Heintzelman

First, Valuation Discounts - The administration has also proposed tightening up the rules regarding valuation discounts used to lessen the gift taxes paid on transfers of property during the taxpayer's life. It is very common for estate planners to utilize various transfer vehicles such as Family Limited Partnerships (FLP) to transfer assets to next generations. For example, parents may form a FLP with assets from the family owned business. The limited interests in these partnerships are gifted to beneficiaries in order to get assets out of the parent's estate. Since these limited interests have many restrictions attached to them, their value is discounted and the amount of gift tax due on the transfer can be drastically reduced or even eliminated.

The administration proposes in HR 436 to eliminate valuation discounts on certain transfers of “Nonbusiness” assets held by partnerships or other entities that are not actively traded. The bill proposes to value those assets as if they were transferred directly to the recipient.  In addition, if a family controls an entity that is not “actively traded”, in contrast to current law, no discounts will be allowed for the transferee’s lack of control of the entity.  Family attribution rules would be back.

Finally, Longer Term for GRATs - Another common estate planning tool for family business owners is a Grantor Retained Annuity Trust, or a GRAT. With a GRAT, business owners can place their stock into a trust for the benefit of their beneficiaries. In return, the owner will receive an annuity stream for a set number of years. This transfer is not seen as a sale and therefore, there is no income tax due.

Additionally, if structured in a certain way, the transfer can also be gift tax free. Sounds great, doesn’t it? As with all transfer vehicles, a GRAT does have some potential "risk" factors. The main one is the risk that the grantor (business owner) may die during the GRAT term. That is, they die during the term set forth in the trust where they are still receiving annuity payments. If this happens, the assets that were placed in the trust are pushed back into the grantor's estate. Essentially, it is as if the GRAT was never formed.

The current administration proposes to impose a minimum 10 year term on GRATs. This would remove some of the flexibility in utilizing GRATs in estate planning.  With a minimum term, the likelihood that the taxpayer could die during their GRAT term could increase in some cases, making the GRAT a less attractive option for minimizing estate taxes for many older small business owners.

So where do we go from here? We start planning! Family business owners who have accumulated substantial wealth need to sit down with their advisors to start planning to pass their assets and value on to the next generation. For those who have already created an estate plan, be certain to review that plan to ensure it still accomplishes your goals and objectives. Even in a few short years many things can change that will make an estate plan ineffective (i.e. legislative changes, family changes, economic factors).

In light of the current recession, I am seeing lower values for business and real estate.  This would make now a great time to start transferring assets to ensure the wealth you worked so hard to create is preserved for your intended beneficiaries.  If you would like to discuss further, please contact me.