Business Succession Planning – How the New Estate Tax Laws Can Help or Hinder the Process

By: Sherman F. Levey, Esq., Counsel

In 2001 Congress passed probably the most cynical tax legislation in its history when it provided that the federal estate tax would be reduced over a period of years (by increasing exemptions, etc.), would be completely repealed only for the year 2010, and then fully reinstated to the 2001 levels in 2011. The only thing everyone knew for sure was that it wasn’t going to happen that way, but here we are in 2009 and Congress still hasn’t acted on it. However, with an Obama Presidency and a Democratically controlled Congress, the outlines are becoming clear as to what will likely happen.

President Obama proposed that the exemption from Federal estate taxes remain at its present $3,500,000 per person. He also suggests that the estate tax rate on estates over the exempt amount remain at its present 45%. There seems to be major support for those proposals (although there may be some “tweaking,” particularly as to the rate).

That’s basically “good news”. It means that with proper planning a married couple can pass $7,000,000 down to the next generation, free of any Federal transfer taxes. Although the statistics vary, it would appear that less than 2% of estates will bear any Federal estate tax, and as a practical manner it means that most privately held businesses can probably be transferred from one generation to another without any serious Federal tax problem. Further, there is some discussion about easing the rules by which the $7,000,000 of exemptions can be used by a couple. Right now it takes some planning by means of appropriate titling of assets and careful direction as to who the beneficiaries of the estate may be. The idea of “transferability” of the unused exemption from the estate of the first spouse to die to the survivor is gaining traction, and that may make estate planning somewhat easier in the future if it is enacted.

That’s the good news; now for the potential bad news. It may very well be that in the political compromise process, the Treasury Department will finally get some legislation which will adversely impact the ability to take valuation discounts for minority interests in closely-held businesses. Currently a widely used technique by estate planners is to create family entities (often by means of a closely-held corporation, family limited partnership, or family limited liability company) and to then have the older generation make gifts of minority or fractional interests of those entities to the younger generation. This strategy often minimizes transfer taxes by aggressively implementing discounts for minority or lack of marketability factors. Although the techniques get a little complex, for many years the Treasury Department has been beating on the doors of Congress to enact legislation which will severely limit a number of these discount techniques. If the Treasury is successful this time, it will close off or restrict a significant opportunity which exists right now.

No one knows for certain when Congress will act; while it clearly has to do something before 2010, it may simply procrastinate, put off the 2010 repeal, and address the issue some time after 2009. However, the path seems clear: if one wants to take advantage of the discounting techniques, there’s every reason to do it in 2009, and no benefit in waiting. Carpe diem!

(Two afterthoughts: The lifetime exemption from Federal gift taxes remains “frozen” at $1,000,000, although that may be increased with future legislation as well. However, the exemption from New York State estate tax liability similarly remains “frozen” at $1,000,000, and there is no indication that the revenue-starved New York Legislature in Albany is going to do anything to change that. Fortunately, the effective New York estate tax rates are not as high as the Federal, but continued inaction of the New York Legislature continues to provide our most affluent citizens with the incentive to take themselves – and their capital and spending – to more tax-friendly venues – and that’s spelled F-L-O-R-I-D-A for many people.)

This article has been republished with the permission of The Rochester Business Journal.

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