Monday, June 16, 2008

I'm no tax expert...

But I've got some theories and I enjoy the game. And I have done my own taxes for 40 years without indictment or incarceration. So, as Aaron and I discuss how to transfer the farm business, one idea has been an installment loan for some assets. It seems we're not the only family considering this approach.

It's a nice problem to have: enough money that you need to think about lessening estate taxes for heirs. And this is a good time to start estate planning, since the interest rates the government sets for one strategy, called installment sales, make it particularly attractive right now.

The strategy is called a sale, but it's more like a loan.

It lets you temporarily transfer, or "sell," an asset to an heir. The asset could be cash, real estate, or a share in a family business, among other things. As long as the heir signs a promissory note, eventually returns the asset, and pays you a government-set interest rate—3.2% in June for three- to nine-year notes—they can keep what they've earned on the asset above that rate.

That benefits both you and your heirs, says Holly Isdale, managing director at Lehman Brothers (LEH). Since the appreciation on the asset above 3.2% goes to the heir, rather than into the estate, it lessens potential estate tax and lets the heir benefit from the wealth now.

What's key to the deal—aside from smart investing and, with real estate, asset valuations that may be low today—is the 3.2% rate, known as the Applicable Federal Rate. The AFR changes monthly but applies to the life of a note and is based on the one-month average of a basket of short-, medium-, or long-term Treasuries. June's rate of 3.2% for mid-term notes, while low, is up from May's 2.74%, the lowest rate since July, 2003. For notes of less than three years, the current rate is 2.08%. [More]
Of course, we would not be expecting the machinery, etc. to be returned, but for the loan to be paid off. I knew there was an official lowest rate allowable, but this helped me understand how it could be used.

Even as we struggle with production problems, our assets are increasing in value. And 2010 - which looked so far away a few years ago - is bearing down on us. Solid predictions on what the politics of estate taxes will look like then are not widely available. This one sounds very appealing:

The estate-tax repeal could find new life in an election-year compromise between a Republican in a Democratic state and a Democrat in a Republican state.

Republican Senator Jon Kyl of Arizona has been talking with Montana Democrat Senator Max Baucus. Baucus is the top Democrat on the Senate Finance Committee. New York Democrat Senator Charles Schumer is taking part in the talks, as well. Aides say that a deal should be reached in the next couple of days.

The senators are working on legislation that would exempt all taxpayers, except the very wealthy, from paying taxes on their estates. This could exempt estates up to $10 million. The senators are also discussing lowering the tax rates that individuals pay on the value of their estates when they die. [More]
We could be facing a pretty serious wealth transfer problem without some action, and a bi-partisan approach offers some glimmer of a solution.

Or an enormously lucrative estate planner's full employment future.


Anonymous said...

Last year, Kyl was going to offer an estate tax amendment to the farm bill.

Baucus promised him hearings and a mark up on the bill if he withdrew it. Kyl did just that.

Baucus gave Kyl 3 hearings, but no mark up. The Democrats cheated Kyl by holding open a vote longer than allowed on an estate tax amendment during the Budget Resolution (tie 50-50).

My opinion is that Kyl will continue to offer estate tax amendments, but they'll be no mark up, and no compromise until 2009 because Baucus broke his promise to Kyl.

Any talk of a compromise is, in my view, unlikely.

The Dems clinging to "Pay-Go" to make their outrageous budget seem plausible will kill any estate tax reform (pardon the death tax pun), but look at the BS arguments about applying "Pay-Go" to the AMT?

Offsetting the estate tax? No chance.

Anonymous said...


We have incorporated and gifted shares at a discounted rate. Thought it would take 25 years to "pass on" the farm. Should complete the transfer in 2 year for a total of 15 years. Be more than happy to share our experience.