Experts will debate for years to come what caused the current economic crisis. Pundits can be found in print media and on TV dissecting what happened and why. For the more practical ”“ and for those who take a long-range holistic view of their finances ”“ it may be time to assess where the silver lining may be and what lies ahead.
One of the elements that must be considered when taking stock of your current position is how your family views long-term wealth. Are your assets durable or multigenerational? Is it just stocks and bonds (hopefully some cash as well) or do you have legacy assets such as real estate and business interests? Do these assets have longevity?
For those who consider themselves to have transferable wealth that can last beyond just their life expectancy, a tremendous set of circumstances has developed. Some may say this is the perfect opportunity to engage in a meaningful process of estate planning. I agree ”“ and can point to four solid reasons why ”“ and this window of opportunity may well shut prior to completion of the next Presidential election cycle.
Reason 1. Effective Jan. 1, 2009, the maximum unified credit is now $3.5 million per person. This reflects the amount an individual can leave tax free off the top of his estate. Although a holdover from the Bush estate-tax reform, this provision has been accepted by the Obama administration. Not to fear though ”“ more to follow on proposed law changes in a bit.
Reason 2. We have all seen the value of our assets drop precipitously in the last 18 months. Estate planning is essentially a cost benefit analysis between retaining control over an asset and transferring it to younger generations further up along the family tree. Given the reduced value of many assets, the cost to transfer is similarly reduced. This effectively allows you to transfer more ”stuff” inside that higher limit.
A second benefit is that as depressed assets regain their value ”“ yes, most will regain their value ”“ all of that appreciation will occur outside of the donor”™s estate.
Reason 3. Interest rates are lower than they have been for many, many years, but most certainly not going to stay that way. Many of the more sophisticated estate transfer concepts include gifts made over time. IRS tax code requires that most of these gifts attach to them an interest component to reflect the time value of money resulting from a gift today that will inure to the beneficiary over time.
These rates, published monthly by the IRS, are at all-time lows. So much like a low fixed-rate mortgage, there is a huge variation in costs to transfer an asset using a 6.1 percent discount rate versus a transfer calculated at a 3.2 percent discount rate. With lower numbers being better for both donor and recipient, many find this to be an ideal time.
Reason 4. Many people have responded to the so called “economic meltdown” with a solid reflection on how they view wealth. For years, the intrinsic value of money has grown in disproportion to its real value as a medium of exchange and commerce. Affinity for collecting dollars, and the associated “points on the scoreboard” mentality, seemed to be eroding the relative value of wealth. The mantra became more is better and current is not enough.
Already we have noticed a subtle but definitive shift in how people plan. Simply doling money out to the next generation is not as desirable as a more coordinated plan whereby social standards and behavior patterns are set. It”™s no longer just what you get ”“ it”™s what you do with it.
How does this shift create a more palatable planning environment? Quite simply, it just makes such discussions more worthwhile. I recall sitting in one meeting many years ago while we assisted a car dealer in the transfer of his estate to his son. In spite of Dad”™s desire to see his empire pass to his progeny, I wondered whether our talents and good efforts were best spent on protecting the future of this relatively self-centered and myopic member of the silver-spoon club. By way of epilogue: About four years after we completed that engagement the father died, leaving the multimillion-dollar dealership to his son. About three years after that, he was forced to sell the franchise at a loss. Post “shift” we see more entrepreneurs tempted to sell the business while living and either donate the cash to a worthy charity or simply dole out the cash as part of the estate process.
So what”™s the hurry? Well, from a legislative perspective, proposals have already begun to drip out on more estate-tax changes. Although the estate-tax repeal versus reform debate has diminished, it is far from over. Nonetheless, with record budget deficits and bailout packages stacked atop stimulus packages, they will need to pay for all of this.  Several reform proposals have already been floated.
Among them, tax-rate increases or surcharges for estates in excess of $10 million and limitations on gifting and/or charitable deductions for donations made as part of an estate-tax program.
Anthony J. Domino Jr. is a registered representative and financial adviser of Park Avenue Securities L.L.C. in Rye Brook. Reach him at ADomino@associatedbenefit.com
