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Valuable Opportunities for Family Wealth Transfers
Maurice Kassimir & Associates, P.C.
Depressed Commercial Real Estate Values Combined With Temporary $5 Million Gift Tax Exemption Create Valuable
Opportunities for Family Wealth Transfers

The continuing recession has played havoc with commercial real estate values. These depressed valuations combined with (1) a very low-interest rate environment and (2) a temporary $ 5,000,000 gift tax exemption ($10,000,000 for a husband and wife), have created valuable opportunities for passing wealth to your children and grandchildren. Valuations of commercial real estate have been hit very hard (even for properties that have good cash flow and are not over leveraged). Just a few short years ago, properties were being valued as high as 20 times cash flow. Now, appraisals can come in around 10 times cash flow or less. When you take valuation discounts into account to reflect lack of marketability and minority interest, a possible valuation can be as low as 6-7 times cash flow (although there are many methodologies appraisers use to determine value). These reduced values create tremendous opportunities to advance your estate planning.

Real estate is typically owned in a Limited Liability Company (LLC) or Limited Partnership (LP). To move your interest in the LLC or LP out of your estate, we usually recommend first having the membership or partnership interests appraised on a discounted basis to reflect discounts for lack of marketability and minority interest. The service of a reputable appraiser is necessary. Simultaneously, you will create an irrevocable grantor trust (sometimes referred to as a "defective grantor trust") for the benefit of the family. The grantor trust is funded with seed capital (usually through $13,000 annual exclusion gifts or gifting a portion of the current $5,000,000 lifetime gift tax exemption). The seed capital must equal at least 10% of the sale price. Any value in excess of the gifted or seeded amount will be sold to the grantor trust in exchange for a promissory note. Using the combined $10,000,000 of available gift tax exemption for a husband and wife can allow for the movement of real estate interests via gift and sale up to $100,000,000. When discounts are also factored in, the undiscounted value of the properties transferred may be as high as $150,000,000. Once the trust has been funded with the seed capital via gift and the appraisal is complete, you will sell your ownership interest in the LLC or LP (or a portion thereof) to the grantor trust in exchange for a promissory note. Under current tax law, the sale to a grantor trust is not a taxable event for income tax purposes.

As stated, the LLC or LP interest is sold to the grantor trust in exchange for a promissory note. If the note is less than 9 years, the IRS stated Applicable Federal Rate for May 2011 is only 2.44%. The cash flow going into the trust (now as the owner of the LLC or LP interest) will be used to pay down the interest and principal on the note. Once it is paid off, future cash flow can remain in the trust and grow outside of your estate (instead of accumulating in your estate and eventually being subject to estate tax).

A tremendous benefit of a grantor trust is that transactions between you and your grantor trust are not taxable. Thus, a sale of an LLC or LP interest to your grantor trust is not a taxable event. However, if an interest representing 50% or more of the underlying property is sold within a 3 year period, there can be NYS/NYC real property transfer taxes of about 3%. This can be avoided by selling less than a 50% interest in the underlying property. In some circumstances, however, it makes sense to pay the 3% real property transfer tax in order to avoid the estate tax. It is important to note that the basis in the hands of the trust is a carryover basis. Because the sale is to a grantor trust, there is no increase in basis. This will result in capital gain taxes later if the property is ever sold. Therefore, if you consider doing a sale, you must weigh potential capital taxes against the estate tax savings. Special attention must be given to investments with a negative basis.

Having assets owned by trusts can substantially enhance tax planning benefits. An added benefit to using a trust is that your descendants will be provided with significant asset protection in the event of a divorce or lawsuit as long as the investment remains in trust. Furthermore, you, as the grantor of the trust can continue to pay the income tax on any trust income. The income tax that you pay under current law for the trust is a tax free gift! The grantor trust can also be used as a FAMILY BANK to make tax free gifts to your children if they need to buy a home or make a business investment.

We strongly encourage you to consider one of the few bright sides of the current economic environment and take advantage of it and the temporary $5 million gift tax exemption for estate planning purposes. It is generally believed that interest rates will soon begin to rise. Inflation may also increase valuations.

If you have a commercial real estate investment, you should seriously consider implementing an estate plan to move these assets out of your estate now!

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As required by new U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this email, including attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.
Maurice R. Kassimir, Esq.
Maurice Kassimir & Associates, P.C.
(212) 790-5719
Institute of Advisors to the Affluent
(646) 703-0039


If you have any questions regarding this matter or any other estate planning techniques, please contact a Maurice Kassimir & Associates, P.C. Trusts & Estates attorney or e-mail us: mkassimir@mkpclaw.com.

(212) 944-1377

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