The question is “how much to transfer” rather than “whether to transfer”! Low values + low AFR = make transfers now
Don’t wait! Now is the time to make gifts. A few months ago we wrote about the opportunity to make gifts of non-controlling interests in privately-held companies. Because valuations were down due to economic concerns and the Applicable Federal Rates (AFRs) were at historical lows, it was a very attractive time to make transfers of shares of the companies. As we all know, the economic situation has not improved from that time, and, in fact, has worsened. As part of the economic decline and recent credit market turmoil the stock market has fallen dramatically. While this is terrible news for those invested in the market from a wealth perspective, the decline represents another incredible planning opportunity, especially for those who have included a family-run entity (like an FLP or LLC) into their planning.
Today, not only are the values of privately held companies depressed, but public company values are also at levels dramatically lower than only a few months ago. Market volatility is at an all-time high, and investors are nervous. Meanwhile, amidst all of the market fluctuations, the AFRs have remained at historical lows. If you believe that the market will rebound over the next ten years, now is the perfect time to take advantage of a rare opportunity.
Extra boost from discounts for non-controlling interests
In addition to the market being down, and the AFRs being at historical lows, the application of valuation discounts to non-controlling interests provides the extra boost that makes the opportunity almost impossible to pass up. Certain discounts are generally applicable to the values of non-control, non-marketable interests of entities that hold these portfolios. By applying these discounts to the interests, it may be possible to transfer huge amounts of wealth over time at very low values, saving significant taxes.
Consider the following example:
Assume a $10 million diversified portfolio held by an FLP in 1998. Assume a transfer of 50% of the LP interest to the owner’s children. After application of a combined 30% discount for lack of control and lack of marketability (for illustration purposes only), the FLP interest transferred had a transfer tax value of only $3.5 million. Assume the death of the parent in October 2007.
At the time of the transfer, the Dow Jones Industrial Average was 8,000. At the time of the death the DJIA was 14,000. Therefore, the underlying portfolio value had increased from $10 million to $17.5 million, not including any increases related to dividends or interest- the increase was purely in the value of the underlying securities. The value transferred at the $3.5 million valuation represented $8.75 million of underlying asset value at the time of the parent’s death.
Time to Act!
If one believes that the stock market will rebound, and that stock values will rise in the future, it is difficult to ignore the transfer planning opportunity presented today. When we consider the possibility of increased tax rates in the future, the low AFRs that also make sales of interests attractive today, and the availability of valuation discounts, it becomes a question of how much to transfer, rather than whether to transfer. The time is now- don’t look back in 10 years and say “I wish I had only…”