How do capital gains rates and interest rates tie into all of this?
For 2009-10, the maximum long-term capital gains rate is going to be somewhere in the zero to 15 percent range. In 2011, the Bush tax cuts will expire, and the 15 percent rate will increase to 20 percent. Depending on which tax bracket you are in for 2009-10, you could see significant tax savings by selling all or part of your company in those years, rather than waiting to do so in 2011.
In addition, interest rates are extremely low right now — the short-term rate (any obligation or note with a term equal to or less than three years) is less than 1 percent, the mid-term rate (greater than three years or less than or equal to nine years) is right around 2.5 percent, and the long-term rate (anything greater than nine years) is 4 percent. The combination of a depressed economy, low interest rates, impending estate tax reform and increased capital gains rates is creating a great opportunity to transfer all or a portion of a business to a new owner.
What are the other benefits of transferring a business now?
From a gifting perspective, taking advantage of the $1 million lifetime gift tax exclusion, depressed valuations and the $13,000 annual gift tax exclusion means you can transfer more of your business now than you could in the past, as well as in the future when valuations increase. With the long-term capital gains rates being at zero to 15 percent, you can structure a gift or a transfer as a sale of the interest, thus taking advantage of the low tax liability and taking the burden away from future generations.
Low interest rates likewise provide opportunities for intrafamily transfers as well as the use of grantor remainder annuity and grantor remainder income trusts. As important as lower capital gains rates and interest rates are, the current economic climate provides another incentive to transfer. Transferring business interests before an economic recovery results in an increased value of such businesses can save estate tax, as well. At this point, you can transfer or gift assets at almost cost.
What are the pitfalls to watch out for?
There are always issues that come up when transferring or gifting a business. You’re not necessarily giving up control of your business, but you are at least giving up a piece of your business interests. This is why people need to balance their estate tax goals with their business goals and their personal issues.
Quite simply, many people prefer not to give up anything and are willing to pay a higher estate tax. But, if you want to take advantage of the current environment and reduce estate taxes, a properly structured gift or transfer can be a valuable asset. Besides offering great tax benefits, a gift or a transfer could help you save money now, rather than having it all sorted out after your death.
You never know what is going to happen in life. Therefore, keep your estate plan flexible. Plan for what you know now, but maintain the ability to adapt if and when tax laws change.
John T. Alfonsi, CPA/ABV/CFF, CFE, CVA, is a managing director of Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or [email protected].
