Wealth transfer opportunities: A silver lining in today’s economy
A two-part series
Developing a sound approach
Part one of two

By Richard Kohan, national partner-in-charge of PricewaterhouseCoopers’ Private Company Services High Net Worth Individual practice

Although every day lately seems to bring yet another morsel of negative economic news, wealth planning is one area in which you can benefit from the economic downturn. Today’s depressed values and low interest rates provide significant opportunities for private business owners to reduce gift and estate taxes by formulating or rethinking gifting strategies. In an otherwise difficult economic environment, this is one opportunity worth exploring.

The primary purpose of estate planning is to be sure that you, not the state, direct how your assets are distributed. Estate planning allows you to provide for family security, business succession, the liquidity of your assets and the capable management of those assets. Another—but secondary—goal of estate planning is to eliminate or reduce federal and state income and transfer taxes. The real tax savings for high net worth individuals comes from lifetime giving, by giving away assets before they appreciate further. Thus, gift planning is the key to optimal wealth transfer planning. Done properly, wealth transfer planning ensures that assets pass to family, charities and other intended beneficiaries at the lowest transfer tax cost possible. Overlooked, it can leave an inheritance largely lost to taxation and legal fees.

Because privately-held companies are valued differently than public ones, different transfer planning opportunities exist. Various valuation discounts may be available, as well as unique treatment of the value of the business upon the death of the owner. There are also unique liquidity issues that arise when a significant portion of the total value of an estate is considered an illiquid asset.

Consider your own lifetime needs, as well as your giving philosophy
An appropriate wealth transfer plan for private company owners blends personal, financial and tax considerations into a comprehensive family wealth transfer plan and business succession plan that preserves a family’s wealth for the individual and his or heir heirs. An effective plan will meet your objectives, whether those objectives are to increase the benefits of ownership and assets, distribute assets to family members or charities, appoint capable estate managers as executors and trustees, reducing taxes, probate and administrative costs, and/or ensure the estate’s liquidity and stability.

Before taking advantage of today’s opportunities, private company owners should take certain essential preliminary steps. The first step is to assess your own personal lifetime needs. Before giving away assets, you need to set aside enough income and assets to meet your expected needs over your life expectancy. Then add a meaningful cushion to that figure. Given all the uncertainties in today’s economic environment, it’s not clear how long or deep the current slump will be. Moreover, there are longer-term concerns about housing and job security, not to mention issues such as the effect of energy policy. Thus, uncertainty needs to take a primary role in planning. What if there is another market collapse in the future? Consider also that an individual’s future medical needs are highly unpredictable—what if health care benefits are lost or there is a catastrophic illness?

Once you are comfortable that your own lifetime needs have been met, excess assets can be considered fertile ground for transfer planning. There may be good tax reasons to gift assets. But don’t let taxes drive your wealth transfer plan. First, consider your life philosophy and family system. How much control over assets do you want to retain? How much flexibility? Do you want to define specific terms? Will the trustee have a high or low level of flexibility?

Also, do you want creditor—and “predator”—protection for designated beneficiaries? Particularly if you will be giving away significant wealth, you will want to consider, for example, the consequences of a gift to a child or other beneficiary who may face a bad marriage, has money management or other difficulties, or who might be talked into a bad investment idea.

You will also want to consider your charitable giving philosophy and desires. “For example, what is your desired balance between gifts to children and charities? Also, remember that if you give money away now, you have lost the ability to drive charitable giving from that asset. While you control assets, you direct how your family uses or enjoy them. If you give assets away during your life to a specific charity, the asset is gone and in the charity’s control. This is not necessarily a bad thing. The real question may be whether you want to make direct gifts to charity year by year, or if you would be better off setting up a private foundation or a donor-advised fund that would dole out money to charity over time, allowing children or other family members to participate in timing and distribution decisions.

Part two of this series discusses the types of trusts that may be used in the current economy as part of an effective wealth transfer plan.

Want to know more about current wealth transfer opportunities?
Please contact:

Richard Kohan
Partner, Private Company Services/Personal Financial Services
617-530-7461
richard.kohan@us.pwc.com

Or visit www.pwc.com/pcs to locate the PricewaterhouseCoopers contact nearest you.