As holiday gift lists are being drawn up, the remaining 16 days of 2009 offer hedge fund investors and managers opportunities to transfer hedge fund shares to family members for what can be substantial tax benefits. In 2009 these transfers take on special significance because so many hedge funds remain below value or gated. While both these situations are less than ideal from an investment perspective, they do create optimal windows for gifting shares to children and spouses at much lower tax rates than seen previously, or in the future as fund performance recovers.
“We’re hearing about many cases where people are making transfers of hedge fund interests right now,” Espen Robak, President at Pluris Valuation Advisors LLC told Opalesque. Robak, recently co-authored an article which goes into the technical details of “using deflated interests in hedge funds for tax-efficient transfers of wealth to heirs.
Lower NAV advantages
Transferring hedge fund shares that are currently devalued and that investors have expectations will participate in the market recovery offers a chance of gifting heirs future value taxed at today’s valuations.
Hedge fund managers are also presented with an opportunity to make transfers to heirs. “For intricate tax law reasons managers typically transfer a vertical slice (one from the general partnership and one from the limited partnership),” explains Robak. Many make efforts to do this early on in the life of the fund, when NAV is low to transfer shares to heirs. For those who have not taken advantage of that opportunity, and have older funds, the lower NAVs that many have now, present the opportunity to make this transfer at much more advantageous levels.
Transferring illiquid assets is a well-practiced estate planning technique. High net worth individuals that currently have hedge fund interests that continue to be gated by managers are presented with the opportunity to gift these assets to heirs now, taking advantage of illiquidity discounts that will lessen the taxes which occur with such a transfer.
“The less liquid something is, the less it is worth. Investors holding shares in funds that are expected to remain locked up for a year, or multiple years have the chance to take substantially greater discounts for illiquidity,” says Robak, who notes that to capitalize on these opportunities transfers need to be completed by year end. Additionally, Robak notes in his article “any discount reflected on a gift tax return must be supported by a qualified appraisal to start the three-year statute of limitations running. Thus a good appraisal can be worth its weight in gold in supporting a valuation discount against an IRS challenge.”