We are well aware of the potential income tax increases that may occur under President-elect Obama’s administration. The next question we should be asking ourselves is “What other tax changes are in our future?” Well, one can only speculate at this point, but there are several options for those looking to protect their assets from taxes that may be perceived as tax “loopholes”. These could certainly become the next target under the new administration. Options such as Grantor Retained Annuity Trusts (GRATs) as well as discounting for private company shares into Family Limited Partnerships (FLPs), in my opinion, would seem to have a bull’s eye on them.
A Grantor Retained Annuity Trust is one of the estate planning techniques based primarily on interest rate assumptions. The financial goal is to pass the appreciation of the assets to the beneficiaries of the trust free of gift and estate tax. Many are now guessing that GRATs may be abolished altogether or, at least, be modified from their current form. Most importantly, these changes could be made retroactive to January 1, 2009.
Family Limited Partnerships (FLPs) allow individuals to transfer personal or business assets into a partnership where limited ownership can then be granted to children or other family members. This not only lowers the estate's taxable value, it also ensures that certain assets remain in the family.
Why do you think the new administration would want to cause such a fuss over these loopholes? Well, the answer is pretty clear when you look at IRS statistics. The IRS found that U.S. companies paid federal income taxes on their reported U.S. profits at far less than the current 35% statutory rate. In the first presidential debate, Obama said: "There are so many loopholes that have been written into the tax code...that we actually see our businesses pay effectively one of the lowest tax rates in the world." In fact, newly released data from the IRS show companies paid federal and foreign income taxes on their U.S. book income, the amount reported to shareholders, at a rate of 25.3% during 2005, the most recent year for which data were made available by the IRS.1 The difference between this rate and the proposed tax increase will offer a substantial revenue source if these loopholes, as well as industry tax breaks, are contained.
The next big question is then, when will these changes take place? Here is where opinions seem to differ. Some tax experts call for tightening corporate loopholes and ending some industry tax breaks quickly, while others say such moves could be counterproductive and end up killing jobs in an economic downturn. Many economists say stimulating the economy, even if it means a record-level deficit, is simply more important right now. So, for many reasons, it looks like 2009 will be a “wait and see” year for estate planning.
No matter what happens with these potential changes, it is important to remember that you should be bringing these ideas to your clients and incorporating the potential for change into the exit planning for your business owners. Who knows, perhaps these potential changes will motivate your owners to take action on these important items, given that there is a bit of uncertainty as to where things are going to land.
So, as we continually encourage, be pro-active with promoting exit strategy planning to your business owners . . . who knows what is going to happen in Washington next year ??
Specializing in Business Exit Strategies, John M. Leonetti, Esq., M.S. Finance, CM&AA founded Pinnacle Equity Solutions to provide exit strategy planning services to business owners as well as education and training programs for professional advisors. To learn more about John's Exit Strategy Services and his recently published book, "Exiting Your Business, Protecting Your Wealth", visit ExitingYourBusiness.com