Private equity managers are joining significant wealth holders in taking action during the last few weeks of 2012 in anticipation of tax hikes in 2013.
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They are refinancing investments, accelerating gains, and shifting transfer assets into trusts. A massive transfer to heirs is occurring because tax cuts are set to expire and new taxes will be put into effect from the health-care law.
Private equity executives also may see increased taxes on their share of profits—called carried interest—from the deals they make.
They have especially zeroed in on the $5.12 million estate and gift tax exemption set to expire January 1.
A typical gift to a relative from a private equity executive consists of a low-valued vertical slice of the executive’s general partner interest in a fund. The slice also includes a portion of the carried interest.
If the gift is made to a trust and does well, its value grows free of estate and gift taxes. Grantor trusts also allow their creators to swap assets initially given to the trust for others of equal value at a later date.
The idea is to accelerate the gain in the general partner’s interest in the underlying assets so that future gains can be tax exempt.
The anticipation of tax law changes is also inciting some partners to refinance loans made to other employees as incentives to get them to invest in deals.
If such loans are made by the partners, they are not counted as qualified capital
and become subject to higher tax rates.