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Estate Tools for the Trusting
Thomas M. Kostigen
02/02/2004
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Trusts and banks that sell RMAs endeavor to position them as investments, rather than as estate-planning products, to keep them as far removed as possible from IRS scrutiny. Fox
and others emphasize the investment benefits of a long-term buy-and-hold strategy, citing the famous Ibbotson Associates historical data on stock performance that shows that long-term investors beat those who jump in and out of the market. They also note that managers will lower their fees if they receive assurance the assets will be locked in for years. Yet, while this may be true, the real advantage of an RMA remains its value as a tax shelter.
"It’s extremely well acknowledged and customary since the 1960s that the tax imposition on a security that’s impacted by liquidity and reduced control [decreases because of] the valuation discount," says Larry Levine, who values RMAs as director of corporate financial services for American Express in Chicago. "It’s really that simple."
The classic example used to illustrate the discount is the case of a person who owns 100 shares of General Motors stock. If he can sell it today, it is worth the market price. But if he cannot sell it for a year, it is worth less, since it is less liquid: It cannot be easily converted into cash, and the owner runs the risk that the market for GM stock will fall before he can sell. The tax authorities recognize this and allow owners to discount assets more and more as the lock-up period grows.
For an estate, discounts are critical. Take the case of a grandmother with $50 million who wants to gift or transfer $40 million to her children and grandchildren. "Using an RMA, that $40 million all of a sudden becomes $24 million, because of the valuation discount," says Scott Hamilton, an estate planner with Strategic Planning Concepts in Chicago.
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