Groundhog Day: A Good Reminder to Make Gifts Before the Sun Shines

Yesterday was a beautiful day in Nashville. Supposedly, that means we’re in for six weeks of miserable weather. Whether or not we receive all of this dreary weather, we expect the sun to be shining bright in spring and summer.

Like the groundhog, a lot of our clients are able to forecast future conditions for their businesses. We encourage our clients to consider their estate planning when conditions are still cloudy, but the future looks bright.

Yesterday, I met with a business owner whose business struggled during the Great Recession. The tide is beginning to turn, and my client believes the business will become very profitable in the next three to five years. Now is a great time for him to make gifts of company stock to a trust for his children. Due to poor earnings for the last three years, an appraiser will put a very low value on the stock. If the stock performs well in the future, the value of the stock will belong to the trust and not to my client. If the stock does not perform well, then my client will only have a modest estate tax problem. His real vulnerability to estate taxes is the possibility that the business will become very valuable while he still owns it.

Prior to making the gift, we will recapitalize the company stock so that 99% of the stock is non-voting and 1% is voting. My client will transfer all of his non-voting stock to a trust for his son and daughter, and he will retain all of the voting stock. This will enable him to control corporate policy, including the salary that he pays to himself. 

Gifts should be made when the future is uncertain, but there remains a possibility of sunny weather ahead. Apparently this is the technique that Mitt Romney used to establish a trust fund for his children that is now worth $100 million without paying any gift taxes. Mr. Romney must have given assets to the trust before they blossomed into full value. It is really quite easy to do as long as you are willing to make gifts before the business becomes valuable. There are numerous techniques for transferring assets in a tax efficient manner after they become valuable. None of these techniques are as good as making gifts before the assets become valuable.

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