Estate Planning & Wealth Transfers – Has there been a better time?

There are times in our lives we each look back upon and say “if only I had”. For many of us those times seem to be focused on events (or non-events) such as “if only I had invested in Microsoft in 1992”, or “if only I had sold my house in 2006.” In terms of estate planning that involves the transfer of ownership interests, we are experiencing a time that will become one of the “if only” times for those who do not act now.

The combination of changing tax laws, historically low interest rates, and low valuations have created a unique environment for wealth transfers to the next generation.

Interest Rates and Potential Tax Changes

As the economy has faltered, key interest rates have declined. The idea of interest rate reductions is to stimulate economic activity by making capital more available. One of the benefits of declining interest rates is lower Applicable Federal Rates (“AFRs”). The AFRs are the minimum rates of interest that must be charged on loans for the IRS to classify the loans as truly debt. The AFRs have been declining for some months and are currently at never-before-seen levels. Many estate planning transfers are made at the AFRs.

The unified credit, the amount an individual can transfer tax-free during his or her life, is currently more than $5 million. Many believe that the $5 million limit is likely to change next year. In fact, if Congress does nothing, the current law creating the $5 million unified credit will expire and the amount will be reduced dramatically in 2013.

Company Valuations

The value of a company is determined by the financial performance of the company combined with the perception of the company in the marketplace. That is, value is equal to some measure of financial performance times some observed multiple of that measure which is reflective of market conditions. Adjusting those market multiples for application to privately-owned companies provides even lower indications of value. Between performance and market multiples, the market multiples, which are generally lower today than several years ago, tend to have a greater impact on total value. However, only the companies’ performance is even remotely controllable.

Over the past several years, as the country has experienced a severe recession and anemic recovery, the valuations of most privately-held companies have suffered, as their growth has slowed or disappeared. Even during the slow recovery, while companies’ performances have improved on many levels through consistent cost-cutting, it is clear to many business owners that increases in revenues may be a long way off. The combination of slow growth and depressed market multiples, while bad for wealth-creation, presents opportunities for transfer planning.

Asset-Holding Entities

When considering estate planning, those who do not own operating businesses are not without opportunities. Beyond the consideration of interests in operating companies, interests of other types of entities can also be transferred, many times at significant “discounts” from their underlying asset values. Ownership of limited partnerships, limited liability companies, and other similar entities that hold investment assets often present owners with the ability to transfer non-controlling interests at advantageous values because of limitations related to control and/or marketability of the interests.

With the lower-than-normal AFRs alongside the potentially advantageous valuations of company interests, coupled with the high unified credit amount (which may not exist much longer), we may be experiencing the best time for estate planning transfers in recent history and for the foreseeable future. Not acting now could lead to one of the biggest “if only” moments in estate-planning.

Please call us or email me at 407-621-2120, rbuchanan@pcecompanies.com if you would like to discuss this article or your valuation needs.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Daniel Kvarnberg

Valuation
dkvarnberg@pcecompanies.com
Orlando Area Office

407-621-2100 (main)
407-621-2132 (direct)
407-621-2199 (fax)