No better time than present to take advantage of early estate planning

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By Michael E. McDevitt

Does anyone reading this not know that our economy is suffering?

I didn’t think so.

More importantly, is anyone not aware that their personal investments are also suffering?

Probably not.

No area of our economy has been excluded from the recent suffering – real estate, the stock market, privately held businesses, etc. While this is obviously not good news, the reduction in the values of your investments presents you with an opportunity to do some estate tax planning – on the cheap.

2009 is probably the best year in recent memory to consider taking steps to move assets to your children or grandchildren. Years from now, people will look back and see that 2009 was the optimal year to make these moves.

Why, you might ask?

The answer is that shifting assets in connection with your estate plan is best done when your assets’ values are at their low point. Although there have been some recent signs of light at the end of the tunnel, 2009 stock values are lower than during recent memory. Add to that, the dramatic drop in real estate values and my guess is that your portfolio isn’t what it used to be.

My portfolio sure isn’t at its high point anymore!

Why now is a great time

You might be thinking that estate planning isn’t an important issue in today’s economy, that it makes no sense for individuals to give away wealth when the economy is doing so poorly. Wrong.

In fact, the combination of low interest rates and current economic conditions present an excellent opportunity for the transfer of wealth to your heirs at little or no tax cost.

Currently, any individual can transfer up to $3.5 million of assets during his/her life and at death to heirs before incurring federal estate tax. Thus, a husband and wife can transfer up to $7 million of tax-free assets.

One important caveat – the maximum amount that can be shifted during life is $1 million, per individual.

We can all agree that $1 million of your assets from 2007 or 2008 are not worth $1 million today. More likely, it would take $1.2 million to $1.5 million to equal $1 million today. You anticipate (and pray) that your assets will return to their old values, or even higher. If that is true, would it not make sense to transfer some depressed-value assets to your children and allow the assets to appreciate while they own the assets?

This will allow you “leverage” on your gifts – the future appreciation will allow your children to realize more value than the current “cost.” Here is an example, to better explain how this works:

You give your daughter 1,000 shares of XYZ Inc. on May 30, 2009. The value of the stock is $75,000.00, which is near the 52-week low. Two years later, the value climbs to $115,000.00. The $40,000.00 of appreciation is your daughter’s – your gift only “cost” $75,000.00 of your $1 million excludable lifetime gift amount.

Leveraging even more

The scenario described above is a pretty good deal, isn’t it? Assuming the assets you gift today appreciate in value during the future, it is better to give these assets today. This way, your gift is at the assets’ current low values, which minimizes the hit to your lifetime gifting exclusion.

Want an even better deal? It is possible to further leverage certain gifts, meaning the value for gift tax purposes is even lower than the already low, current depressed values. This is accomplished with the use of “discounts” for certain gifts. These discounts reduce the value of certain types of assets – minority interests in privately held businesses, interests in real estate and others.

A detailed discussion about why discounts are theoretically appropriate for these gifts isn’t possible in limited space, however the general idea is that these assets are worth something less than their pro-rata piece of the whole asset value because you don’t control the asset.

For example, if you give your son 10 percent of your business, the value is less than 10 percent of the value of your whole business because he can’t make decisions for the company – you’re still in control with 90 percent interest.

Use of these discounts is a bit complicated. Normally, you would need to have them appraised by an independent expert, who would assess the appropriate discount, given the particular facts.

Start before the rebound

You will be kicking yourself in a few years if you missed the opportunity to make some estate planning transfers now. Follow these steps to get started:

Create a personal financial statement, listing your assets and liabilities. Be sure to include the current value for each asset. If you don’t know the exact value, use your best judgment.

Decide which assets have the best opportunity for appreciation during the future. These will be the best candidates to gift to your children or grandchildren.

Decide which assets you can comfortably gift without impacting your current lifestyle. For example, do not gift the asset that provides your only source of income.

Meet with your attorney and tax adviser to review your work and implement your plan.

Michael E. McDevitt CPA is a tax director at BiggsKofford P.C. He can be reached at or 579-9090.