Three Big Reasons Not to Delay Estate Planning

If you own a business, there may never again be a time like the present to complete an estate plan. By taking advantage of three time-sensitive opportunities, business owners can transfer wealth to children in smart, safe ways that enhance the potential for continued growth of that wealth.

1. Pending legislation may eliminate many current tax benefits.  A cost-effective way to transfer wealth from parent to child is by transferring non-voting or minority interest shares, partnership interests or limited liability company membership interests (closely held business interests) by sale or gift to children either outright or in trust. These types of business interests are valued by the IRS by applying discounts for lack of control and marketability, and “can” or “typically” range anywhere from 20% to 45% of underlying enterprise value.  Recently, there have been a couple of proposals in Congress and at the federal level that would eliminate most, if not all, valuation discounts for closely held business interests. Given the magnitude of federal and state budget deficits, it is certainly possible these proposals might become law before year end. A business owner who intends to transfer the family business to his or her children should strongly consider doing so now while the tax laws are still favorable. Once gone, this significant tax benefit may never come back.

1. Interest rates are at historic lows. Another effective way to transfer wealth from parent to child is to do a non-taxable sale of a closely held business interest to a grantor trust in exchange for a promissory note. With IRS interest rates at historic lows, this transaction is even more attractive. If the value of the business interest sold increases at a rate that is greater than the interest rate on the promissory note, the excess value passes tax free to children. The IRS interest rate on this type of transaction is currently 2.66% (October 2009 Midterm annual AFR). In 2000, the same IRS interest rate was over 6%. Given the huge budget deficits and the magnitude of recent federal spending, inflationary pressures will mount, and we may never see interest rates this low again.

1. Now’s the time to receive a favorable business valuation.  Every estate planning transaction involving a closely held business interest, whether a taxable or non-taxable sale or a gift transaction, requires a good business appraisal. One key component of any business appraisal is the outlook of future economic growth. Given the near collapse of the equity markets in the fall of 2008 and the current economic conditions, there is no better time than now to obtain a favorable valuation for a closely held business interest.

A stuttering economy, political arm wrestling and the ever-present issue of good timing are legitimate reasons to think twice about estate planning. But in a peculiar twist, those exact issues are creating a once-in-a-lifetime estate planning opportunity that should not be overlooked, especially by business owners.

William F. Forsberg is a shareholder at the law firm of Leonard, Street and Deinard, where he co-chairs the Estate Planning and Probate practice group.