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A Good Time To Review Estate Tax Plans: Decline in asset value prompts new strategies

The fallout from an unsteady economy that has toppled Wall Street also is shaking up New Jersey, with unemployment rising and fears that more upheaval is yet to come.

But the financial maelstrom may offer opportunities for business owners, according to some accountants and lawyers, who say the downturn in stocks, housing and other assets makes it a good time to review estate tax plans.

Now is a particularly good time for business owners to think about estate tax planning.

One such planning vehicle is a grantor trust—a way to transfer business interests and other assets to next-generation heirs while minimizing estate tax liability.

A low-interest-rate environment could open up good opportunities to move a business from the senior generation to the next generation of owners.

One strategy involves transferring ownership rights in a closely held company without losing control of the business.

A business may be able to create two classes of stock or interests, preferred interests—with fixed or stated priority as to dividends or distributions—and common interests that allow for future appreciation.  The current owner would retain the preferred interests, thus ‘freezing’ the value of his or her retained share of the business, while the common interests would be gifted to the owner’s children.  Those common interests would appreciate with the market’s recovery.

Another way to reduce the taxable value of an estate involves gifting cash, an interest in a business or other assets without running afoul of exemptions to gift taxes.

Generally, individuals can give away as much as $13,000 a year per recipient without having to pay a tax based on the value of the gift. On a cumulative basis, donors generally are subject to a $1 million lifetime exemption before they have to pay tax on the gifts.

The key is to leverage these gifts using techniques that allow for discounts, or to take advantage of the currently low IRS valuation and interest rates.