1. Pending legislation may eliminate many current tax benefits.
One of the most cost-effective ways 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 Interest) by sale or gift to children either outright or in trust. These types of business interests are valued by the Internal Revenue Service (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, Congressman Earl Pomeroy (D-ND) introduced a bill, H.R. 436, in the House of Representatives that would eliminate most, if not all, valuation discounts for Closely Held Business Interests. It is unclear whether this legislation will pass, but given the magnitude of the federal and state budget deficits, it is certainly within the realm of possibility. Therefore, a business owner who intends to transfer the family business to his or her children at some point should strongly consider doing so now while the tax laws are still favorable. Once gone, this significant tax benefit may never come back.
2. Interest rates are at historic lows.
One of the most effective ways 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 2.25% (June 2009 mid-term annual applicable federal rate). 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.
3. Now is the time to sell.
There is no better time to get a favorable business valuation. Every estate planning transaction involving a Closely Held Business Interest, whether it is 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 dire current economic conditions, there is no better time than now to obtain a favorable valuation for a Closely Held Business Interest.