Owners Should Pass More Company Shares to Heirs Today, Says Advisor

3 min read

By Keat Foong, Executive EditorRaleigh, N.C.—Now is the time for gift giving and estate planning, according to a consultant to the real estate industry. Owners of companies intending to continue as family businesses should take advantage of depressed values in the recession to pass more of the companies’ ownerships to future generations, suggests Curt Young, […]

By Keat Foong, Executive EditorRaleigh, N.C.—Now is the time for gift giving and estate planning, according to a consultant to the real estate industry. Owners of companies intending to continue as family businesses should take advantage of depressed values in the recession to pass more of the companies’ ownerships to future generations, suggests Curt Young, senior associate of the Investment Banking Group at FMI.“You can effectively give more assets because the values are depressed, under the premise that the economy and valuations will recover,” says Young. “It is very common in the construction industry, including multifamily, to see these economic swings historically.” Young has co-authored an article for the FMI Quarterly: 2009 Issue entitled “2009’s Grim Economy—A Time for Giving?” FMI provides management consulting and investment banking to the construction industry worldwide. The company says it creates value by enhancing the performance of companies by mitigating risks. Under existing laws, individuals can gift up to $13,000 exempt from gift tax. (The lifetime gift tax exemption is $1 million.) With regards to estate taxes, the Economic Growth and Tax Relief Reconciliation Act of 2001 lowered tax rates while increasing exemptions over a period of time. In 2009, an estate valued at $3.5 million or less is exempt from estate taxes. Above that amount, the estate is subject to estate tax rates at as high as 45 percent. Young explains that if for example the business has declined by 50 percent, the owner can give two times more than under “normal” conditions. And on the estate planning front, owners can freeze the value of estates placed in trusts to today’s value, explains Young. So if $1 million is placed in the trust today, that value is frozen such that when the value increases during an economic upswing, the trust “gets the benefit of that value increase tax-free,” says Young. Anything can be gifted, says Young, including stocks and ownership interests in the company. In the article, Young and co-authors Hobson Hogan and Tony Perrone advise property owners who “make gifts to heirs on an annual basis that now may be the time to gift more shares and a larger ownership interest in the company in order to take advantage of the bad news/good news of today’s market.” “If the business is valuable, a lot of that value may be lost through taxes,” says Young. Owners should provide gifts to their beneficiaries throughout their lifetimes if they want to avoid the punitive taxation when they pass away, he explains. One pitfall to watch out for in estate planning and gift giving is that gifts are typically irrevocable, notes Young. There is also some uncertainty about what estate taxes will look like in the near future—they may or may not become more favorable after 2009. For one year, in 2010, there will no estate taxes at all when the current estate tax laws will be repealed altogether. And in 2011, the estate taxes will return to the more punitive rates and exemptions in place in 2003: 60 percent maximum and exemption levels of up to only $1 million, according to FMI.“The general expectations are for [the estate tax laws] to be resolved this year before they repeal in 2010, but there is uncertainty about what is exempt from estate taxes,” says Young. He says there are some indications from the Obama Administration that estate tax exemptions will be kept at (the more favorable) 2009 levels. The $13,000 per person gift tax exemption will not be affected.

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