Gifting and transferring Featured

7:00pm EDT November 25, 2009

With depressed valuations and advantageous capital gains rates, now is an ideal time to transfer all or part of your business to the next generation.

“There are several techniques that estate planners can use in order to accomplish transfers of interest, and they are all based on taking advantage of the current tax and economic environments,” says John T. Alfonsi, CPA/ABV/CFF, CFE, CVA, a managing director of Cendrowski Corporate Advisors LLC.

Smart Business spoke with Alfonsi about the current tax environment and why now is an opportune time to gift or transfer your business.

What is happening in the area of estate tax reform?

As it stands right now, the estate tax is going to be repealed for 2010, meaning that when people die, their estate will not owe any estate tax. For 2009, there is a $3.5 million estate tax exclusion — the first $3.5 million is tax-free and anything above that is taxable. In 2011, it is expected that there will be a $1 million estate tax exclusion and a maximum 60 percent tax rate (including surcharges).

Again, this is all being discussed and hashed out right now. The majority of pundits believe that we won’t have a zero percent estate tax in 2010. We won’t go back to where we were before, though; some kind of happy medium will be found.

How will gifting be affected by estate tax reform?

Right now, the annual gift tax exclusion is $13,000 per person, per year, and it looks like it will remain that way through 2010. Included in the $3.5 million estate tax exclusion for 2009 is a $1 million lifetime gift tax exclusion. So people can take advantage of that $1 million exclusion and still have $2.5 million left over to avoid or mitigate estate tax.

Also, part of estate tax reform could include the elimination of discounts when calculating the fair market value of closely held businesses. Typically, discounts are given due to a lack of marketability or a lack of control. If you were gifting a minority interest in a business, those discounts could have been significant and reduced the value, which would have allowed you to gift away more or not use as much of the gift tax exclusion.

With the possibility of those discounts being taken away, it’s best that you take care of your gifting now, while you can still get the discounts. If you do take advantage of these discounts, make sure they are documented and calculated by a valuation professional.

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