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 titans 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.

“Even if a company has not been directly impacted by Wall Street troubles, this may be a particularly good time for business owners to think about estate tax planning,” since certain tax strategies are pegged to interest rates, says Elizabeth E. Nam, a senior manager in the family office group of Rothstein Kass, an accounting firm with an office in Roseland.

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 like this could open up some good opportunities to move a business from the senior generation to the next generation of owners,” Nam says.

In some cases, the value of real estate and other assets are now at depressed levels, so “giving them away now can mean that any later growth will be excluded from an individual’s estate, for tax purposes,” says Warren K. Racusin, a partner in the Morristown law office of McElroy, Deutsch, Mulvaney & Carpenter LLP. He is co-chair of the firm’s private client services group, and focuses on estate planning and other matters.

“This opportunity is perhaps the best since the early ‘90s, when we went through the savings and loan crisis,” he says. “Stocks, real estate and some business assets have taken a drubbing, so getting them out of an individual’s estate now may make sense.”

Scott Testa, a tax principal at the East Hanover office of Friedman LLP, an accounting firm, agrees.

“It’s a classic move,” he says. “When assets are depressed, you can generally gift more of an interest in them at a lower value, potentially reducing your taxable estate and your exposure to gift tax liability.”

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,” Testa says. “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 $12,000 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,” Testa says. In

the case of marketable securities that have depreciated below the value paid, “it may be best to sell the shares first and then gift the cash.”

The timeline of the estate tax is another consideration, Testa says. It’s scheduled to be repealed in 2010, and reinstated in 2011.

“I’ve been counseling clients about strategies they can adopt,” Testa says. “But some of them are hesitant to take any action because of uncertainty surrounding the future of the estate tax.”