The current economic recession has created several new opportunities in estate planning. Values of certain assets, such as businesses, marketable securities and real estate, are lower now than they were a year ago. This allows you to transfer more of each asset for a lower amount.
But there are people who have decided not to take advantage of these new opportunities and put off estate planning. They may not feel as wealthy, may have lost some wealth because of the economic crisis, or don’t feel as if their assets are valuable or won’t be increasing in value anytime soon. But it’s important to be proactive and start planning now.
“You want to take advantage of these low values and gift and transfer wealth now while you can still lock these values in,” says Brian Bornino, CPA/ABV, CFA, CBA, director of Valuation Services at GBQ Consulting LLC.
Smart Business spoke with Bornino about how to take advantage of the new opportunities in estate planning and different solutions for dividing your assets up equally among family members.
What are some key things to remember when gifting or transitioning wealth?
There are so many techniques and strategies that you can get bogged down in the details. It’s important to sit down with someone you trust and walk through your goals. Whom do you want to receive this money, what’s the ultimate estate plan, and who’s supposed to end up with your current assets?
Devise a plan that you’re comfortable and happy with. A lot of times advisers try to sell clients complicated plans that may provide better results, but may leave them uncomfortable. You need to be happy and comfortable with the plan, and understand that your money is being taken care of in the right way after you pass away.
How do you take advantage of the new opportunities available?
Gifting of shares needs to be based on a fair market value. When values are low, a greater percentage of your business may be transferred without triggering the gift tax. For taxable gifts, the gift tax will be lower because of today’s lower values. Values when planning for real estate can also go up and down with the economy. Values are generally down now, so it’s a good time to have real estate appraised and do transactions with real estate based on this lower value.
Why is a business valuation an important part of gifting and wealth transitioning?
Any type of transfer you make, whether it’s a sale, gift or transfer, is subject to review and scrutiny by the Internal Revenue Service because of the gift tax associated with these actions. You need to demonstrate and document the fair market value of the transferring shares and have a comprehensive report prepared to support the transaction.
Your business is also typically the largest asset in your estate, but it’s the hardest to divide. You need to know the business’s value if you’re trying to figure out who inherits what and how much wealth you’ll transfer to each person.
A good strategy can help in transitioning the business, because many different scenarios can happen, especially if your family is continuing the business. For example, you may have four children but only one is active in the business. You want your estate to be equally divided, but you don’t want the active child to be the only one with a piece of the business. You also don’t want everyone running the business. But there are many solutions to this situation.
How can you divide a business up equally among family members?
The first is recapitalization of voting and nonvoting shares in the business. You would do this to a small percentage of the business’s voting shares, for example 10 percent. The other 90 percent would be nonvoting shares, which you can transfer to the nonactive children. The active children can then maintain voting control of the business, while the nonactive children receive the same economic benefits. This also allows you to transfer ownership and wealth without transferring control of the business, since you can keep your voting control until you’re ready to transfer it.
A second strategy is to create a family LLC or FLP. For example, let’s say you have a $10 million piece of real estate that’s your primary asset. This is a difficult asset to break up among children, but you still want to maintain ownership in the real estate. You can put that building into a family LLC or FLP and gift units in that entity to children, almost like shares of a new company. The units are a function of the value of the real estate.
Why is gifting and transitioning your wealth so important?
There are several financial benefits. Estate tax is onerous and can quickly get up to as high as 50 percent once you cross the threshold of a taxable estate. Half of the wealth you’ve spent a lifetime accumulating can go away quickly if you don’t plan.
There are also psychological benefits. Many people worry about leaving their children and inheritance when they pass away. If you’re able to give away or gift value while you’re still alive, you can see your children receiving enjoyment from that gift. Most children would rather receive a gift while their parents were still alive rather than after they pass.
Brian Bornino, CPA/ABV, CFA, CBA, is the director of Valuation Services at GBQ Consulting LLC. Reach him at (614) 947-5212 or firstname.lastname@example.org.