Shift Business Assets to Family

Before Your Company Hits a Grand Slam

From Atlantic Trust

Atlantic Trust recommends wealth transfer strategies ideally suited for business owners.

One of the most compelling reasons to make lifetime gifts is the prospect of removing assets, along with any subsequent increase in their value, from your estate. This is especially true for business owners who anticipate a liquidity event such as a sale or an initial public offering. By shifting assets to family members beforehand, you can shelter the increased value from estate tax.

The challenge is to avoid or minimize the gift tax—currently 45%—associated with such transfers. “Fortunately, a couple of planning devices can help you do that,” says Judith A. Saxe, Managing Director & Senior Wealth Strategist at Atlantic Trust.

Grantor-Retained Annuity Trust (GRAT)
Here the person setting up the trust, known as the grantor, puts appreciating assets into an irrevocable trust and retains the right to receive an annual income stream (an annuity) for a preset time. If the grantor survives that period, any property left in the trust when the annual payments end passes to family members.

In order for the GRAT to create little or no gift, the annuity should be approximately equal to the value of the assets transferred, plus an assumed rate of return known as the Section 7520 rate. This rate, set each month by the U.S. Treasury, is 5.8% in September.

Shares in a closely-held business are an ideal asset to put into a GRAT, says Linda S. Beerman, Managing Director & Senior Wealth Strategist at Atlantic Trust. If they appreciate at a rate greater than the Section 7520 rate, all the excess passes to the grantor's heirs with little or no gift tax. On the other hand, if the appreciation never occurs, the grantor is no worse off. In this case the annuity would be paid by returning some of the shares to the grantor.

Installment Sale to a Grantor Trust
With this popular alternative to a GRAT, senior family members sell assets to a trust that will benefit younger relatives and in exchange take back an interest-bearing promissory note. Assuming a sale at fair market value and interest at the applicable federal rate, which is lower than the Section 7520 rate, there is no gift and therefore no gift tax. Both the property sold and any future appreciation are removed from the grantor's estate. This strategy, which also works well with shares in a closely-held business, requires that the trust have other assets—ideally worth at least 10% of the property being transferred. Often the grantor supplies this seed money using the $1 million lifetime gift-tax exemption.

Beating the Interest Rate Hurdle

The goal, with each of these strategies, is for the business assets to appreciate by more than the interest rate by the time the trust or loan term ends. The more they do, the more wealth you will have shifted to family members.

To learn about which techniques might be appropriate for your business, contact Sharon Cohen at scohen@atlantictrust.com or Judith Saxe at jsaxe@atlantictrust.com.

In addition, TCI will be holding a roundtable discussion this coming fall with Atlantic Trust to discuss these essential strategies. More details will follow.

This document is intended for educational purposes only. The information and opinions expressed do not constitute investment advice or recommendations, or an offer to buy or sell any security. The material presented does not constitute accounting, tax or legal advice. It is not intended or written to be used, by any individual or entity for the purpose of avoiding penalties that may be imposed by the IRS or other taxing authority. Atlantic Trust Private Wealth Management is comprised of Atlantic Trust Company, N.A., a federally chartered trust company, and Stein Roe Investment Counsel, Inc., a registered investment adviser.

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