3 Ideas For Transferring Assets

To those dealers who are poised to survive the current crisis, you know there will be money to be made and opportunities to enhance your business, which will result in the increase of your estate.

Therefore, now is the time to take action on your estate and succession-planning.

With the results of the election now complete, it is clear to everyone that estate taxes are here to stay. The present rate is 45% with a lifetime exemption of $1,000,000 and an exemption at death of $2,000,000 (if you have not used your lifetime exemption). Under current law the exemption at death is scheduled to increase in 2009 to $3,500,000. Both Democrats and Republicans appear to be committed to locking in $3,500,000, but with the financial upheaval, it is anyone's guess as to what changes will take place when the update of the estate tax law takes place in 2009.

The estate taxes are due nine months after death, with the exception that if your business assets are worth more than 35% of your adjusted gross estate, you can pay the tax on the business assets over 14 years at favorable interest rates, though the interest is not deductible.

Bottom line is you need a lot of liquidity in a hurry! Since most dealers have their net worth tied up in stock and real estate, this can be a killer in terms of your family's ability to continue running your dealership after you are gone.

So, what are your options?

With values significantly depressed today, you expect the values to increase when the market turns, simply gifting or selling shares of stock or an interest in your dealership should result in seriously lowering the eventual estate taxes your family will have to pay. When you gift or sell minority interests in your stock or real estate, you will be able to do so utilizing valuation discounts for lack of marketability and lack of control.

A Limited Liability Company (LLC) is a flexible business and investment entity which permits income shifting and discount gifting among family members, as well as protection from the claims of creditors for assets placed in the Limited Liability Company. It allows you to control an asset, receive income and transfer equity to your children on a tax favorable basis. You continue to run your business and utilize this asset, while benefiting your family and reducing your estate taxes.

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust in which the grantor/parent transfers income-producing assets and retains the income interest for a fixed number of years. At the end of the specified period the asset and any appreciation passes to your children or a trust for your children for their benefit. It provides potential to transfer assets at a fraction of value for a minimum gift while receiving income from the trust.

An Intentionally Defective Grantor Income Trust (IDGIT) is an estate planning tool used to freeze certain assets of the grantor (the dealer) for estate tax purposes, but not for income tax purposes. The grantor “sells” assets to the trust in exchange for a promissory note of some length, such as 10 or 15 years. Any appreciation in the asset value is within the IDGIT and outside of the grantor's estate. The balance of the promissory note is includible in the grantor's estate. It allows you to sell an asset to your children without paying capital gains tax. Since you pay the income tax on the income earned by the trust assets, this increases the estate planning benefits.

The choice is yours — wait until the market turns and you are more comfortable (and the values have risen substantially) or act now and take advantage of this tremendous opportunity. Your dream of succession can come true, but it takes courage and vision to act in these unsettling times.

CERTIFIED FINANCIAL PLANNER^™

Hugh Roberts is president of H. B. Roberts Co. He can be reached at 818-610-3480 or at [email protected]