Archive for month: January, 2011

Using Qualified Disclaimers as a Hedge for Tax Uncertainty

Categories: Wealth Transfer Strategies

Using Qualified Disclaimers as a Hedge for Tax Uncertainty – Wealth Strategies Journal 2.0 (Beta)
As Seen In Wealth Strategies Journal, October 2010
Article By: Joe Luby, CFP®

Use this simple and unique solution to add flexibility in dealing with estate tax uncertainty

What a remarkable time to be in the business of advising wealthy families on financial, tax and estate issues! It’s remarkable both in terms of the changes and significant developments in the field, as well as for the opportunity afforded us as advisors to set ourselves apart and proactively solve client concerns. Many practitioners are hamstrung this year with indecision, worry and fear about what may or may not happen with income taxes, estate tax, generation-skipping transfer (GST) tax, etc. It’s unfortunate for their clients because we’re situated in the perfect tsunami of wealth transfer opportunities. Asset values are way down, tax rates are the lowest they’re going to be in most of our lifetimes and interest rates are near zero. Wealth transfer strategies should be on the top of advisors’ minds right now.
As of this writing, it doesn’t look like Congress will act anytime soon on estate tax reform legislation. Common expectations in the industry expect Congress to eventually enact some version of the law we had in 2009, perhaps with some minor variations. No one knows for sure, but that seems to be the consensus lately. One fear commonly expressed by practitioners nationwide is that Congress could try to enact retroactive legislation and thereby disrupt any transactions put in place today. For example, if they retroactively raised the gift tax to 45 percent or 55 percent from the current 35 percent, then gifts made today become more expensive. The same fear applies to a retroactive GST tax, which could create a double whammy for gifts made in 2010.

Simple Solution
There’s a simple but unique solution to these concerns: the qualified disclaimer (QD). In short, to be a QD under Internal Revenue Code Section 2518(b), the QD must:

· be in writing; and
· be made within nine months of the date of gift or the date the recipient reaches age 21, whichever is later.

Additionally, the recipient may not have accepted the gift, used the gifted asset(s) or benefited from them. The recipient may not direct where the gifted asset(s) goes upon receipt of the QD (that is, the gift either reverts back to the giver or to the next designated beneficiary, if applicable).
Most of us think of QDs for post-mortem planning opportunities. For example, the primary beneficiary of a retirement account may use a QD to redirect the funds to the contingent beneficiary for a variety of reasons. Or, a surviving spouse may use a QD for all or some of the assets in a disclaimer trust,” which specifically incorporates the QD as part of the upfront planning.
In 2010, clients can use QD planning for lifetime gifts to add flexibility and a solution to the issues described above. Taxable gifts made between now and Dec. 31 are subject to the current gift tax rate of 35 percent under 2010 law. If we wait to see whether Congress acts retroactively with an increased gift tax rate or GST tax, we will wait ourselves and clients right into 2011 when we know the rate is scheduled to go up. The time to act is NOW. Clients can use the QD procedure to undo the gift later, should Congress enact a retroactive tax increase.

Take the following example: Tom Clark would like to gift $2 million of marketable securities to his son Bill. He establishes a trust naming Bill as primary beneficiary and his wife, Mary Clark as contingent. The trust is drafted to qualify as a completed gift for tax purposes, and Tom funds the trust with the $2 million securities portfolio. The family now has nine months (assuming Bill is age 21 or older) to decide if they want the gift to stand. Should Congress enact a retroactive increase in the gift tax, Bill will simply disclaim his interest in the trust, which then flows to Mary as contingent beneficiary. The entire transaction is gift tax-free if this option is triggered since the gift is now between spouses. And if the gift tax rate isn’t increased retroactively, the Clarks have locked in the lower gift tax rate by completing the transaction in 2010.
The same set of circumstances applies to gifts made to grandchildren in the event a retroactive GST is enacted. Grandparents can use this opportunity to shift significant wealth using the reduced gift tax rate in effect for 2010 and no GST tax, while still retaining flexibility in their planning if necessary to undo the gift.
Additional opportunities are present when using QD planning this year as well. Assume Congress doesn’t act retroactively and thus the current 2010 gift tax rate of 35 percent applies. However, Tom’s $2 million portfolio suffers significant losses and drops significantly. The QD option allows the family to reconsider whether paying the gift tax on $2 million (even at the lower rate in 2010) is really the best strategy. It may make sense to undo the gift via QD and structure a new gift of the now devalued assets, even though the nominal tax rate may be higher in 2011. If the assets are depressed in value already due to market turmoil over the last few years, the reverse may apply. If the $2 million portfolio recovers significantly in value, the family wins by having locked in the gift now in 2010 at the lower value and reduced gift tax rate.

Discounted Value Assets
Lastly, any gifting strategy using QDs can be greatly enhanced with the use of discounted value assets. The net after-tax impact of the gifting strategies described above is even higher when the asset gifted is subject to valuation adjustments. Examples of such assets are fractional real estate interests, closely held business interests and private investment funds. For example, an asset subject to a 30 percent discount results in a net effective federal gift tax rate on the full asset value of less than 25 percent. So not only can the client lock in 2010’s lower gift tax rate with the flexibility to undo the transaction later, but also he can even reduce the effective rate via proper advanced planning.

Joe Luby Shares Essential Financial Information (Washington DC’s Metro Magazine – Part 2 – July 2010)

Categories: General

Joe Luby Shares Essential Financial Information (Washington DC’s Metro Magazine – Part 1 – July 2010)

Categories: General

Using Private Investment Funds to Enhance Roth Conversions

Categories: Retirement Strategies

As Seen In Investment Advisor Magazine, October 2010
By: Joe Luby, CFP®

A new and unique opportunity exists for advisors and clients to achieve significant investment and tax advantages. Cutting edge advisors that offer comprehensive solutions to their clients will appreciate the inherent advantages offered in a private investment fund (PIF).
Private investment funds can do all of the following in one convenient package:

• Provide access to institutional (i.e. non-retail oriented) portfolios, pricing, managers and opportunities
• Protect against investor “bad behavior” that can disrupt ongoing management
• Create accounts that stay with the advisor for a guaranteed period of years
• Provide opportunity for smaller investors to access portfolios that normally have prohibitively high account minimums (generally $5 million and higher)
• Give the ability to control capital gains tax implications in down years
• Create opportunity for customized solutions for a particular firm and/or group of clients
• Achieve significant tax savings on Roth conversions and other IRA distributions
• Achieve significant tax reduction for gift and estate tax strategies

Private investment funds can be customized to meet a variety of needs. In some cases, they will have the look and feel of traditional mutual funds albeit with some distinct differences. A PIF typically has a limited number of investors who each own some fractional interest of the fund. The investment model within the framework of the PIF can be designed and allocated to suit that particular group of investors’ needs. Another common element is a predetermined time horizon suitable to the targeted investors.
For example, an investment advisory firm may have fifty clients that all fit a specific profile. These clients have a similar time horizon and investment objective. The firm could use a PIF designed specifically to meet their needs and only invest those clients in the fund.
PIFs are designed for the long-term investor who wants to truly commit to a specific portfolio and/or objective for a predetermined amount of time. The concept is similar to a closed end mutual fund owned by a limited number of like-minded investors. Each PIF carries a specific time horizon that may be as short as three years and can be much longer depending on the specific group of investors and their common goals. PIFs are generally not suitable for active traders, market timers or clients with investment horizons shorter than the fund term. They are not suitable for dollars the client is likely to need for living or other expenses during the term of the fund.
Most advisors recommend taking a long-term approach to money management and investments. As a group, they tend to leave the active trading decisions to professional money managers via separately managed accounts, mutual funds, etc. Many are specialists in modern portfolio theory and asset allocation strategies and with good reason. Investment success is more likely for most of us when we take this approach. No one has the ability to be right consistently via market timing and trading activity. Investments don’t always move in the direction one thinks or hopes they will. Thus it is more common to find advisors that create asset allocation models and select mutual funds or other investment products to fill the various asset classes within a desired portfolio.
The last two years taught advisors that despite all their discussions with clients about long-term performance expectations, individual investors can and will make short-term emotional decisions about their money. Over the five quarters ending March 31, 2009, long-term equity mutual funds experienced a net outflow of $410 billion (Investment Company Institute, Worldwide Mutual Fund Assets and Flows Statistics, dated 01/27/2010). This kind of outflow and redemption activity wrought havoc on fund managers who were also dealing with a very difficult investment environment at that time. Managers were often forced to liquidate positions at deep losses or sell into illiquid and declining markets. A PIF, with its specified investment term or time horizon, is one solution for both the client and advisor.
At first glance it may seem a drawback to commit funds for a certain period of time. But for an investor with a longer time horizon (typical timeframes are 3-5 years), investing alongside other committed investors for mutual gain and profit can be very attractive. Anyone who has ever put funds into a retirement account, purchased an annuity, long-term CD, private REIT and other similar holdings has already shown a propensity for and comfort with long-term holdings.
The following are examples of investment advantages provided by properly designed and utilized PIFs:

• Consistent fund asset size due to restrictions on liquidity or redemptions by investors during the term
• Manager can take a true long-term investment approach without worrying about managing for cash inflows and outflows
• More potential for consistent results when asset sizes do not fluctuate except via fund performance
• Ability for the advisor to customize the fund portfolio
• Capital gains may be controlled and recognized when advisable rather than generating taxable gains even in years when the fund shares lose value
• Funds/accounts are not easily transferred to other advisors depending on the PIF design (Note this is an advantage to the advisor, not necessarily the client depending on circumstances.)
• Significant tax reduction opportunities for Roth conversions, RMDs and other IRA distributions
• Significant tax reduction opportunities for gift and estate planning scenarios

PIFs can often gain access to the institutional and high minimum account size portfolios not generally available to individuals through retail outlets such as SMAs, open end mutual funds, etc.
Money managers generally prefer closed end type funds over daily liquidity funds. They love not having to deal with constant fluctuations in assets and cash flows. And since PIFs typically have fixed terms such as three, four or five years, the manager knows that the account is “sticky.” This structure allows them to take a true investment management approach without worrying about cash reserves for redemptions and being forced to buy or sell at a bad time. If capital gains are generated, even in an otherwise down year, the fund has the option of making a cash distribution to investors to cover the tax bill or recognizing losses to offset the gains.
PIFs are generally limited partnership or limited liability company structures adhering to partnership taxation status. They are private placement investments under the SEC rules and thus are generally only available to accredited investors with relatively high account minimums ($100,000 – $1 million is typical).
By definition, PIFs are not traded publicly on an exchange and do not have readily ascertainable quotations of value or prices per unit. Thus the funds must be appraised regularly in order to determine the fair market value (FMV) of the interests owned by investors. PIFs actually have two different values at any given time including FMV and net asset value (NAV). NAV is fairly straightforward and simply measures the total value of the underlying portfolio divided by the total units outstanding. FMV takes into account a variety of factors based on the fact that investors hold an illiquid minority interest in a private fund that is not readily marketable on an open exchange. It is common for appraisers to apply valuation adjustments (discounts) when valuing such an asset. Depending on circumstances, a typical adjustment may be 25% – 35% from the fund’s NAV. For example, a 30% adjustment would result in a FMV of $70 on a fund unit with a NAV of $100.
FMV is important as it is the value required to be used for all tax reporting purposes. Any taxable transaction involving the PIF units owned by an investor must be reported at the accurate FMV as required by the Tax Code. These include gifts, estate valuations, transfers to charitable lead trusts (CLTs), transfers to grantor retained annuity trusts (GRATs), installment sales and/or gifts to intentionally defective grantor trusts (IDGTs), Traditional to Roth IRA conversions, Traditional IRA required minimum distributions (RMDs) and many more. And therein lays the tax advantages that may be gained by investors holding PIF interests.
Consider the following Roth conversion situation. A client converts her $1 million Traditional IRA to a Roth IRA resulting in federal tax at today’s top bracket (35%) of $350,000. Now assume the client’s Traditional IRA held $1 million NAV PIF interests prior to the conversion and that the FMV of those interests is $700,000 as determined by the appraiser. She then completes the Roth conversion resulting in only $245,000 of tax due to the reduced income reported on the 1099R from the conversion ($700,000 taxable FMV x 35% tax = $245,000). This client has effectively locked in a maximum 24.5% tax rate on their conversion instead of the actual top bracket of 35% ($245,000 of tax / $1 million IRA NAV = 24.5% effective rate)

Take the Roth conversion opportunity. Assume a client with a $1 million Traditional IRA. If he does a Roth conversion while the IRA holds traditional open end funds or cash, he will receive a 1099R from the IRA custodian reporting $1 million of taxable income. At a forty percent federal and state combined tax rate, he will owe $400,000 in income tax.

His brother has a $1 million Traditional IRA which he invests in one or more private funds. The appraised FMV reflects $700,000 at the time of conversion. He gets a 1099R from his IRA custodian reporting $700,000 of taxable income which results in a tax bill of only $280,000 using the same forty percent tax rate. But ultimately, this client still has the same $1 million NAV as the brother above and will enjoy the same tax free treatment of those dollars in retirement under the Roth distribution rules. However, he saved $120,000 of income tax on the overall transaction.

Private funds that achieve the above described valuation adjustment between NAV and FMV can be used in multiple gift and estate tax planning scenarios including GRATs, charitable lead trusts, intentionally defective grantor trusts, installment sales, etc. Anytime there is a tax efficiency to be gained via the arbitrage between NAV and FMV, such funds may be a good fit. This is always provided that the investment objective and time horizon of the fund is also a good fit for the client.

Private funds are a very specialized business and the “devil is in the details” as they say. Companies such as Jagen™ Investments create and operate a series of private funds with the characteristics described and available to advisors and clients nationwide. They can also work with advisors and firms to build private label or exclusive funds available only to that advisor or firm’s clients. Companies generally require a commitment of $25+ million in client assets in order to create exclusive fund offerings.

Private investment funds not only offer significant opportunities for clients, but also for advisors. Advisors that are able to bring advanced solutions to their clients and prospects are invaluable. Advisors that are able to bring the investment and tax efficiencies offered by private funds to their clients and prospects will grow their businesses substantially in 2010.

Valuation Adjustments – An Opportunity for Planners

Categories: Wealth Transfer Strategies

As Seen In NAPFA Advisor, June 2010
Article By: Joe Luby, CFP®

Valuation adjustments, often referred to as “discounts,” should be on the strategy list of every comprehensive planner. They can provide amazing tax efficiencies for clients, offer opportunities to collaborate with other professionals and allow the planner to bring an advanced planning technique to high net worth clients and prospects.
Traditional securities, such as stocks, bonds and mutual funds, are easily valued due to the liquid nature of their markets. Other non-traded assets are a little more difficult. What is the current fair market value (FMV) of your client’s real estate holdings? What is the current FMV of the partnership interest they own with their golf club buddies that invested in a private placement startup company? What is the FMV of your client’s personal business? See what I mean.
The FMV of these assets is important for a number of reasons. It directly affects your clients’ net worth statement. It affects their total estate value and the gift tax value when these assets are transferred to other family members and/or charity. It affects business transition and succession planning including the possible sale of a family run business. It could impact their liquid securities portfolio allocation. However, I submit that very few clients, much less their advisors, know the FMV of these assets or even a close approximation thereof.
Why not? Much of it has to do with an unspoken cost/benefit analysis. If a client isn’t considering the sale of a particular illiquid asset such as an apartment building, then knowing that asset’s current FMV may not seem important and thus not worth the expense of an appraisal. The same thinking applies to their personal business. Does it really matter if the business is worth $8 million or $10 million today assuming no pending sale or transfer activity? Maybe not, but how does one plan for the long-term financial security of the family if they don’t know the value of all the assets at their disposal?
Dr. Carl Sheeler, valuation expert and managing partner of Alison Appraisals and Assessments, Inc. in San Diego, has an interesting view on this topic. He gives presentations around the country about business valuation and often raises the question: how does one manage the liquid assets for a business owner without taking into account the value of the business from a prudent investor viewpoint? Dr. Sheeler also gives multiple examples of how performing a current business valuation and analysis has lead to significant opportunities to increase the value of the business by finding areas of weakness and improving them.
The FMV of an illiquid asset must be determined by a qualified appraisal as defined in the tax code. The qualified appraiser must take into account relevant factors that may impact the FMV of the asset being valued such as whether it is readily marketable should the owner wish to sell. The appraiser must consider the asset’s liquidity and whether the owner has a controlling interest which allows them to force distributions or otherwise control the management and operations of the asset. These are the three most common principles that give rise to a valuation adjustment or discount: lack of marketability, lack of control (minority interest) and lack of liquidity. There are other factors that apply in various circumstances, but these are the most common and universal. Assuming a minority interest in an illiquid non-traded asset, it is very likely that the appraiser will report a FMV that is less than net asset value (NAV) or book value.
Assume your client Bill owns 25% of a small manufacturing firm. The other 75% is owned in equal parts by three of Bill’s college buddies. They started the company together in their senior year and have been in business for 15 years. The company is profitable and growing. Bill decides to cash out by selling his minority stake and move to the mountains to become a ski bum. On paper, the book value of the company is $10 million, meaning that Bill’s stake is theoretically worth $2.5 million. But can he actually sell it for $2.5 million?
The three partners don’t want Bill to leave the company and also don’t have the means currently to buy him out. So Bill must find a buyer for his interest. After several months of putting out feelers, he finally has someone interested. However, they will not pay Bill’s asking price of $2.5 million and instead demand a FMV analysis. The qualified appraiser reviews the company in great detail including the history of the firm, the projections for the future, any contractual obligations between the partners which may be defined in the partnership agreement (LP) or operating agreement (LLC) or other documents (C or S corporation). The appraiser takes into account that the new buyer will be purchasing a minority interest in the company and will not be able to out vote the three close college friends that have been in business together for 15 years. The new buyer will not easily be able to convert his ownership to cash should he decide to sell at a later date. Thus the appraiser’s FMV report comes back reflecting a 50% valuation adjustment or discount and quotes the current FMV of Bill’s 25% stake as $1.25 million.
This is usually where negotiations between Bill and the potential buyer will begin. Bill may argue for higher than $1.25 million due to a variety of factors such as future cash flows, business opportunities or growth forecasts, etc. Whatever number they agree on will be the true FMV of Bill’s interest. The appraisal was the best estimate absent any actual sale transactions to compare.
How can we use this knowledge and opportunity for clients? Knowing that illiquid assets may be subject to substantial discounted valuations, planners can assist clients in a variety of wealth transfer situations to reduce the tax impact that would otherwise apply. For example, assume Bill was not selling his interest but rather transferring it to several trusts for his children’s benefit and assume that gift tax would normally apply. In the example above, Bill is able to use the lower $1.25 million figure for reporting the value of the gifts rather than the $2.5 million book value, saving him one half the gift tax due.
The most common application of valuation adjustment principles is by use of a family limited partnership (FLP) or family limited liability company (FLLC). These entities are regular LPs or LLCs except they are owned entirely within a particular family (i.e. no outside non-family partners or members). The common scenario has Mom and Dad, the senior generation family members and source of wealth creation, establish the FLP/FLLC and transfer various assets into it. Typical holdings include real estate, family businesses, other partnership interests, securities portfolios, etc. Mom and Dad then transfer minority interests in the FLP/FLLC via gift or sale to various children, trusts and/or charities. Prior to the transfer they retain a qualified appraiser to perform an analysis and determine the FMV of the minority interests to be transferred.
The same valuation adjustment principles described above apply to these interests. Lack of marketability, lack of control (minority interest) and lack of liquidity all factor in to the FMV report for the FLP/FLLC interests. Adjustments or discounts in the range of 25% to 50% are common on these assets.
FLPs/FLLCs can be combined with numerous other wealth transfer techniques to maximize the benefit from the valuation adjustment. For example, a client may transfer discounted assets to a charitable lead trust (CLT) that has been “zeroed out” for gift tax purposes meaning that no taxable gift is made upon funding the trust. The client’s children or trusts for their benefit might be the final principal beneficiary of the CLT. Any amount above the discounted FMV will ultimately pass tax free to the heirs. Discounted assets can be used to fund grantor retained annuity trusts (GRATs) in the same fashion.
Another common scenario involves the sale of discounted assets to intentionally defective grantor trusts (IDGTs). As a grantor trust, the tax consequences of activity in the trust flow back to the grantor. So the sale of assets from the grantor to the trust does not result in a taxable event, nor does interest paid on a note from the sale generate taxable income since the grantor is selling an asset to himself for tax purposes. The IDGT will typically have the grantor’s children as beneficiaries. Instead of gifting assets to the trust and incurring gift tax or using up the grantor’s lifetime gift tax exemption, the grantor will sell minority interests in the FLP/FLLC to the IDGT in exchange for a promissory note payable over a term of years. The sale price is the FMV as determined by the appraisal rather than NAV or book value of the FLP/FLLC interest.
For example, assume a 10% FLP/FLLC interest with a book value of $1 million. The FMV as determined by qualified appraisal reflects a 40% adjustment down to $600,000. The client will sell the FLP/FLLC interest to their IDGT in exchange for a promissory note of $600,000. The additional $400,000 of value is effectively passed tax free to the next generation.
Planners and clients can also use private investment fund structures such as those offered by Jagen™ Investments to achieve the same type of discounts. Private investment funds apply the same valuation adjustment principles found in FLPs/FLLCs without the hassle of forming, funding and managing a FLP/FLLC. The administration and qualified appraisal process are handled at the fund level which saves the client and their advisors time and money. In addition, these funds are typically IRA compliant which means clients can get discounted valuation advantages on Roth conversions and other IRA distributions reducing the tax impact of those transactions.
The devil is always in the details so you must ensure that you work with very qualified advisors including attorneys and CPAs who understand this area in depth. There are common mistakes to avoid and many best practices to implement in order to achieve the desired outcome for your clients. These are important because the IRS, for obvious reasons, is not a fan of valuation adjustments and loves to challenge them when possible. Assuming the proper steps are taken in establishing and operating the FLP/FLLC, it often comes down to an argument over what the FMV really is. In many cases this results in a judge trying to decide between the taxpayer’s valuation expert and the IRS’ appraiser, where the judge must determine whose valuation analysis is most accurate. It is not uncommon for judges to find the actual FMV somewhere in the middle between the two experts numbers (i.e. taxpayer’s appraiser says 45% discount, IRS’ appraiser says 15% discount, judge goes with 30%).
This may also be the best time to implement valuation adjustment strategies with high net worth clients because we don’t know what Congress will do with the estate tax just yet. There are proposals floating around that would limit or disallow discounts in various circumstances. If you have clients and prospects that could benefit from discount valuation planning it is best to move quickly to implement these strategies ahead of any potential changes down the road.

Intra-family Loans in Today’s Low Interest Rate Environment

Categories: Wealth Transfer Strategies

As Seen In The WealthCounsel Quarterly
October 2010
Article By Joe O. Luby III, CFP®

Various planning techniques are more in favor during periods of low interest rates such as we are experiencing in the US today. One of these strategies involves the use of intra-family loans to help shift wealth from one generation to the next with little or no transfer tax impact.

The current applicable federal rates (AFRs) for short-term, mid-term and long-term loans are 0.53%, 2.18% and 3.79% respectively (August 2010). In short, if the investment or asset transferred can outperform these extremely low rates, the clients win big.

Consider the following straightforward example: Mom sells a rental property to son for full fair market value of $100,000 and takes back a promissory note in that amount. The note has a twenty year term and thus uses the long-term AFR of 3.79%. The “cost” of this wealth shift to the son is the annual interest payment on the note. There is no gift tax consequence and the asset is removed from Mom’s estate for estate tax purposes. This is also known as an asset “freeze” technique because all future income and capital appreciation on the property are outside of Mom’s estate. The amount included in Mom’s estate calculation has been “frozen” at the current value of the promissory note but never more than $100,000. Assuming the net rental income and long-term capital appreciation on the property exceed the low AFR in effect, the transaction is a success.

Outperforming the AFR is a key component in these scenarios because it is the excess growth in asset values and future income post-transaction that is being shifted without transfer tax. That is why these strategies are so attractive today. It’s much easier to outperform a rate in the 2%-3% range than one in the 7%-8% range for example.
An even more powerful application of the intra-family loan strategy is the sale of discounted assets. These can be closely held business interests, partial interests in real property, fractional interests in other property or assets such as airplanes, private investments such as Jagen funds, etc.

For example, Dad owns a mid-size manufacturing concern and daughter works for said company. Dad sells a ten percent stake in the company to daughter in exchange for a promissory note at today’s long-term AFR of 3.79%. The ten percent interest in the company has a book value or net asset value of $1 million, but due to typical valuation adjustment factors such as limited liquidity, lack of marketability and lack of control (minority interest) a qualified appraisal reflects a fair market value of only $650,000 (35% adjustment). Thus the promissory note reflects $650,000 – fair market value. When the transaction is complete and the note satisfied, any value above $650,000 is essentially a tax-free gift to daughter. Dad has removed the asset and any future growth in value from his estate. The promissory note “freezes” the estate tax value of the asset at $650,000, or less depending on when Dad dies and how much principal may have been repaid on the note by then.

As with any technique, there are multiple variations on the same theme. In each of these cases the buyer could be a trust or trusts rather than the children personally. Depending on the asset sold and the relationship with the buyer, these transactions can also be a way for the senior generation to begin teaching the adult children about asset management, investing, the family business, real estate management and the competent handling of wealth. Mom and Dad can help guide son or daughter with the management of the asset purchased which can prepare them for a larger inheritance later on.

These are two simplified examples of how to use today’s low interest rate environment to motivate clients to action and produce excellent long-term results for their family. We often hear that clients are sitting on the fence until something more permanent is done on the estate tax. Bringing these techniques to the table can get clients to take action today that will be beneficial regardless of what happens to the estate tax.

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