Time to Transfer Early Stage Investments?

October 7, 2016 | Spotlight

Proposed IRS regulations that may be effective as early as the end of 2016 are designed to severely limit use of discounts on gifts or sales of property to family members.  These new rules get serious attention from families with typically a $20m+ net worth.

Some families are “done” with gifting. Others are ready to move quickly by the end of the year — particularly in light of the new estate and gift tax rates proposed by Hillary Clinton last week.  See the bullets, below (proposed rates of 45% on estates over $3.5m, rising to 65% on estates over $500m).  Combining these stated rates with the other changes in Clinton’s proposal, this could easily amount to a tax of 75%+ on the uber wealthy.   (No matter your politics, that certainly suggests that some planning is in order.)

Under current planning rules, discounts of 30-50% could apply to assets transferred in properly structured transactions.  These new rules are designed to disallow use of those discounts in family transfers.

Examples where families have been interested in last-minute 2016 transfers:

  • Fund managers–putting a piece of their GP interests into trusts for kids/grandkids, using early low valuations of portfolio companies, in combination with further valuation discounts.
  • Family office–putting all family oil interests (at already depressed values) into a very long-term play to be owned by grandkids, using an appraised lack of control/marketability discount (on top of 80% drop in value from two years ago). As the client said–our oil interests are “free.”
  • Family office–putting its 9-figure stock and bond portfolio into trust for kids, using an appraised lack of control/marketability discount off the publicly traded values.
  • Private equity client–admitting that, at last, he’s “got enough,” and then transferring every “early stage” investment he’s worked on over the past two years into dynasty trusts for kids and grandkids, at “face” amount of his initial investment (given little early appreciation), less a substantial appraised discount, when he hopes there are 10X returns built-in to those deals.

Per the September 23, 2016 Wall Street Journal, the new Hillary Clinton estate tax proposal:

Exempt: first $3.5m
45% rate $3.5m – $10m
50% rate $10m – $50m
55% rate $50M – $500m
65% rate $500m+

No basis step-up at death.

Gift or bequest of assets will trigger any built-in gains at the time of transfer.

Call if we can help you think this through.  Potentially the year 2016 represents the last opportunity to utilize long-tested discount techniques and avoid what may be catastrophic gift and estate tax rate increases for the wealthy.