As a result of the recent downturn in the energy sector, many businesses have significantly declined in value over the past year. While this downturn has been devastating to many and has affected nearly all aspects of business along the Gulf Coast, it may actually be beneficial from an estate planning perspective. Indeed, the decline in business/asset values combined with the continued increase in the federal estate tax exemption and historically low interest rates may offer significant estate planning opportunities for business owners desiring to transfer assets to their descendants.
A major objective of effective estate planning is to pass as much of your wealth to your descendants as possible in the most tax efficient manner possible. When asset values decline, an opportunity exists to shift significant wealth to your descendants while minimizing gift and estate tax consequences. This can be accomplished by transferring the depressed-value assets to your descendants; and, if the assets subsequently appreciate in value, all of this appreciation in value will occur outside of your taxable estate. The goal is to remove the assets from your estate at today’s depressed values, rather than at a later date when the assets will presumably be worth more. By removing the assets from your estate while prices are temporarily depressed, you may have significant tax savings in the future.
By way of example, suppose Harry owns 100% of the limited liability company units (the “Units“) of Oilfield Service Company, LLC (“Oilfield“). Harry is approaching retirement in a few years and intends to transfer the Units to his two children Bill and Jill, in equal portions, as each child is involved in the business of Oilfield. Prior to the industry downturn, the Units had a fair market value of approximately $20,000,000. Nevertheless, as a result of the depressed oil and gas market, Harry now estimates that the Units are worth approximately $12,000,000. Harry realizes that the industry downturn is likely cyclical and strongly believes that the Units will increase substantially in value in a few years. By making current gifts of the Units to Bill and Jill (outright or in trust), Harry has an opportunity to minimize the gift tax (and potential estate tax) consequences of transferring the Units. If the Units do indeed increase to their pre-downturn value, Harry’s tax savings could total around $3,000,000.
Some of the potential planning opportunities involve gifts to grantor trusts (including grantor retained annuity trusts), installment sales to grantor trusts, outright gifts to beneficiaries, etc. Furthermore, through the use of limited liability companies, family limited partnerships or other closely-held business structures, taxpayers can currently leverage the use of valuation discounts to potentially provide further tax savings. Note, however, that the IRS is expected to release proposed Treasury Regulations later this year, which may affect the availability of such valuation discounts. Thus, it may be important to act quickly to take advantage of the potential benefits offered.
In sum, planning opportunities may exist in today’s depressed market, which could result in significant tax savings to taxpayers and their descendants. For assistance in identifying these opportunities, please contact Andrew Sullivan at (504) 585-7734 or firstname.lastname@example.org.