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Market Turmoil Creates Estate Planning Opportunities

Recent months' stock and bond market gyrations have created enormous estate planning opportunities for family business owners. These opportunities probably exist even if your business or industry is unaffected by unsettled world affairs.

Last spring, a family business owner-client planned to give some of his stock to his kids. We obtained an appraisal in May, but the transaction got delayed until September. An updated appraisal showed a value of almost 30% less per share, even though there had been no change in business operations or outlook. The result of the four-month delay was that my client could transfer about 30% more stock with no additional gift tax consequences! What happened?

Market Values Drop

Appraisers typically use financial information from comparable publicly traded companies as yardsticks to value family businesses. For example, the appraiser may multiply a public company's price-to-earnings ratio (which is the current market price per share divided by 12 months' earnings per share) by your business' 12-months' earnings to give one gauge of your company's value.

The market turmoil over the past year has substantially reduced the price-to-earnings and other financial ratios of public companies in many industries. The side effect is a decline in many private businesses' appraised values for gift and estate tax purposes. Smaller companies' stock values have been hit the hardest due to investors' flight to quality and a preference for the greater liquidity offered by large cap stocks. For example, in the third quarter, the Wilshire Small Cap and Russell 2000 indices dropped 22.7% and 20.5%, respectively, after declining around 5% in the second quarter. That compares to declines of around 10% for the Dow Jones Industrials and S&P 500 indices in the third quarter and slight gains in the second quarter.

The value decrease in small public companies translates into similar declines for most closely held businesses. Moreover, lack of marketability discounts for closely held companies tend to increase in periods of market volatility. The result? Your company's stock value may be lower than it has been for a long time. That creates an opportunity for you to transfer more stock at less cost.

Interest Rates Plummet

The current incredibly low interest rates also substantially improve the economics of the more sophisticated estate planning transactions, including:


  • Installment sales between family members, because the minimum required interest rates are lower than ever;
  • Sales to defective trusts (see May and June 1995 Family Business Advisor), again due to low interest rates required for the notes;
  • Grantor retained annuity trusts (see September and October 1995 Family Business Advisor), because the gift tax discount for the retained annuity is enhanced with lower interest rates;
  • Charitable lead annuity trusts because the charitable gift tax deduction for the annuity increases.


Some techniques are adversely affected by declining interest rates. For example, the Qualified Personal Residence Trust technique provides a smaller discount for transferring your primary residence or vacation home.

Business owners typically feel "poor" when business and economic conditions are tough or uncertain. Recession-related concerns (including fears about personal financial security) may make wealth transfer seem undesirable at this time. Your focus may shift to short-term operational issues. But the stock transfer opportunity presented by temporarily depressed values and low interest rates cause us to urge you to step back and consider the bigger picture.

Certainly, gifts should not be made solely for tax reasons without considering other important issues. Your own financial needs, desire to maintain voting control, concerns about whether your children are mature enough to handle the responsibilities of ownership are very real concerns and must be factored into your plans.

Just don't let the occasion of recent market conditions pass by without at least considering the opportunities it presents.




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