10 Years Later, Estate Planning Deja Vu – With a Twist

10 Years Later, Estate Planning Deja Vu – With a Twist

Cory Grant is a founding partner of Grant, Hinkle & Jacobs. This blog shares some of his personal experience working in the real estate and life insurance fields for over 20 years.

In 2009,I participated in a panel discussion at the University of San Diego. The panel was sponsored by the Burnham-Moores Center for Real Estate. The conference was covered by the media and the California Real Estate Journal wrote a follow up article on the ideas discussed. The other day, I was flipping through my resources and I came upon that article.

The article made me consider how many of the concepts and opportunities that were discussed over a decade ago are presenting themselves today in a different light.

Back in 2009, the estate tax exemptions were $3.5 million per individual and the economy was rebounding from a significant downturn. Combine these factors with historically low interest rates and you had a great opportunity for wealth transfer. With low values and low interest rates, it became a very attractive time to transfer assets to future generations. Some families were wise enough to benefit from the opportunity, others were not. Let’s take a quick peak at one family and their experience.

This family was able to move significant wealth and appreciation from the estate of the senior generations while also providing liquidity to pay any remaining estate taxes. Conversely, a family that did nothing would have captured the appreciation over the past 10 years within the taxable estate of the senior generation.


Plan Early If You Can, Shift Opportunity As a Wealth Transfer Strategy

After reading the example ahead, planning ahead can prepare you for the future. Fast forward to today: what opportunities present themselves?

Today, real estate values are high – much higher than in 2009 – across all asset classes. Estate tax exemptions are higher as well, up to $23 million per couple. But one element remains the same as 2009; low interest rates.

Over the past several years, we have seen an uptick in large family gifts and sales. Even if real estate values are high, if the intra-family interest rates are in the 2.5% range, it makes it easier for the transferee to afford the interest payment if the asset transferred has cash flow.

Here is how it works: Let’s say “Dad” decides to sell an apartment worth $10 million to a trust for the heirs in exchange for a note. If the average net income on the apartments is 6% or $600,000, the trust can easily afford the $250,000 interest payment. The excess ($600,000 – $250,000 = $350,000) can be used for principal reduction, the acquisition of life insurance for estate liquidity, or additional investment.

One of the families featured in the 2009 article have grown their portfolio and transferred significant wealth. Now the heirs’ trusts have enough assets and cash flow that they can participate in investment opportunities. So, when Dad finds a new investment, instead of acquiring it in his estate, he instead refers the opportunity to the heirs’ trusts. The family still benefits from the investment but does so in a much more estate tax-efficient manner.


Protect Key Non-Family Members On a Tax Friendly Win-Win Basis

What about the real estate family that has key employees or executives who happen to have the “wrong” last name? You cannot expect them to be excited about stock options. After all, what is stock in a family company worth?

Many family businesses that have key non-family employees use non-qualified deferred compensation or a SERP agreement to retain them. The program basically works like golden handcuffs for the executive. Governed by an employment agreement, the SERP typically provides that the employee will get a predetermined benefit at some future date so long as he or she stays with the company. This can be a great way to achieve business succession and retention goals without offering equity.

From the company perspective, there are tax benefits as well. The money set aside over time to fund the plan is not tax deductible, but its sits on the books as a growing current asset. This makes it attractive to bankers and for valuation purposes. If invested properly, the cash account can grow tax-deferred and be available to the employee on a tax advantaged basis. When the employer pays the funds out, in a lump sum at retirement or as salary continuation, they get to deduct the entire amount paid out, not just the original contribution to the plan.


Summarizing a Decade

Even though property values have increased over the last decade, today’s persistently low interest rates and high exemption amounts have created another opportunity for families and business owners to make meaningful, tax-efficient wealth transfer decisions.


To learn more about the changes that took place over the last decade and determine other strategies to help you and your family contact our team.