Waiting for a thank you note from the IRS?

Enjoy kicking yourself for missed opportunities? If not, there’s no excuse to put off estate planning, particularly now. Decreased business value plus low interest rates make now the perfect time to take action. And pending legislation means the window of opportunity may be closing.

A window of opportunity exists to use estate planning tactics which may not be available for much longer. Several factors have come together:

1. The current economic climate has resulted in the reduced value of marketable securities, real estate and business interests. Clearly it’s less costly from a tax perspective to transfer property when its value is lower.
2. Interest rates are extremely low. IRS imposed minimum interest rates on notes for sales to family members have been very low for some months now. For February 2009, a note with a term of 9 years or less with annual payments requires a rate of only 1.65%.  A note with a term of 3 years or less with annual payments requires a rate of just 0.6%.  Now is an excellent time to execute a sale to family members.
3. A proposed tax bill, HR 436, contains a provision which eliminates valuation discounts for transfers of fractional interests in entities containing non-business assets.” This is aimed at eliminating the use for estate planning purposes of investment partnerships (like family partnerships with marketable securities) real estate partnerships where the transferor does not meet the rules for “material participation” and active businesses holding passive assets beyond reasonable working capital needs.   Planning now allows you to take advantage of these discounts before they disappear.

If your estate including your business life insurance retirement plans and other assets is worth more than $3.5 million your heirs will pay substantial tax – 45% – on their inheritance. Under the current law you can create non-controlling interests in the assets which discounts their value due to lack of marketability and lack of control. Then by selling those interests in exchange for an installment note you’ve locked in their value. When you’re gone the only thing taxed in your estate is the value of the unpaid note.

If you haven’t acted yet chances are you’re thinking one of the following four things.

• “Yes but I’m not ready to relinquish control of my business.” And you don’t need to. You can still retain complete day-to-day control of the business relinquishing nothing.  Transferring non-controlling interests in a business or partnership can accomplish this goal.
• “Yes but I need income from the business to fund my retirement.” And that’s fine. Using the technique above you can arrange to have the cash flow you need from the payments on the note.
• “Yes but not all of my children have been involved in the business.” And that’s one of the best reasons to plan before it’s too late. Without proper planning you can’t designate who inherits your business your real estate or your other wealth. Wealth transfer planning means you decide who gets what.
• “Yes but I’m too busy to think about it now.” That’s the worst excuse of all. Procrastinating could cause you to miss a great window of opportunity. Depressed market values and low interest rates make this the right time to address wealth transfer planning.

One thing’s for sure if you delay long enough only the IRS will benefit. And they’re not likely to send you a thank you note.

John Anzivino leads the estate and trust practice at Kaufman Rossin. one of the Southeast’s top accounting firms. He can be reached at janzivino@kaufmanrossin.com.