Believe it or not, there is a silver lining in today’s economy when it comes to estate planning and particularly passing the family business to the next generation. The current economy notwithstanding, two primary reasons for business succession failure are lack of proper estate planning and that many business owners wait until death to transfer ownership of the family business to the younger generation at significant estate tax cost. As discussed below, the current environment of low interest rates, depressed asset values and valuation discounts make it an opportune time for senior owners of closely-held businesses to pass the torch to the younger generation at minimal transfer tax cost.

What Can You Do?

Interest rates are at historical lows. This offers the owner of a closely-held business an opportunity to make loans to a child or grandchild purchasing the business under terms the descendant may be able to afford. Typically, to structure a loan to a family member that meets IRS guidelines, the loan must bear interest at a rate which at least equals the monthly rate issued by the Internal Revenue Service, referred to as the Applicable Federal Rate or “AFR.” The AFR for July 2009 for a note with a term of three years or less is only 0.82 percent. If the loan is 3-9 years, the AFR increases to 2.76 percent and for a loan of nine years or more, the AFR is 4.36 percent. Given these low AFR rates, family loans or sale of business interests pursuant to installment sales are ideal ways to transfer wealth and assets to the younger generation.

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