I was talking to a friend of mine at a recent Chamber of Commerce event, and we started to talk about the new estate tax. My friend owns three Internet businesses. He said that his businesses, prior to the Great Recession, had been appraised at $2.8 million. His business volume is still down 24%, from the 2008 peak. His “guesstimate” is that his businesses are still worth $2 million today. He also said that he expects his business volume to increase significantly in late 2013 and into 2014.
He said, “I guess I won’t be needing any estate tax planning, now that Congress has changed the minimum taxable estate to more than $5 million.” I replied that he was focusing on the wrong thing. I asked him (as I frequently ask my clients), “How much do you think your business will be worth, not today, but at the end of your life expectancy?” My friend pulled out his calculator, punched in a few numbers, and then said, “I hope to live until I’m 90. If my business grows at an average annual rate of 3%, then when I am 90 my business will be worth $23 million.” Then he thought for a minute and continued, “Say Paul, could I ask you a few more questions about the estate tax?”
I explained to my friend that his “best move” would likely be to move his businesses “out of his estate,“ so that when he died, his estate would not be burdened by a $23 million taxable asset. I also explained to my friend that it is a lot easier to move a $2 million asset conservatively out of your estate, when you’re in your 40s, then it is to move a $20 million asset aggressively out of your estate, when you’re in your 80s. I told my friend that, with careful planning, he and his spouse could move the businesses out of their estate, but still benefit from the income and wealth created by the businesses, and still maintain full control over the businesses.
I also explained that because we are in a historically low interest rate environment, that many advanced estate tax planning techniques, which are interest rate driven, are much more efficient at this time, than they will be when interest rates go back up. Also, due to the recession, business valuations are currently low (which is good), and that additional valuation discounts, for sales and/or gifts of minority business interests, are also generally higher (which is also good).
In other words, 2013 is the “perfect storm.” For business owners, this is the best possible time to do some long-term, conservative estate tax planning.