Private-equity managers making 2012 moves as tax increases near

, Bloomberg


Sandy Presant

Private-equity managers are bracing for higher taxes in 2013 and in the final weeks of this year are refinancing investments, accelerating gains and shifting what they transfer to trusts.

Top earners face higher taxes on wages, investments and money transferred to heirs starting next year because of tax cuts set to expire and new taxes for high-income Americans from the health-care law. Executives in the private-equity industry also may see taxes rise on their share of profits in buyout deals — known as carried interest — as Congress looks to raise revenue though an overhaul of the U.S. tax code.

"They're economics first," Sandy Presant, an attorney at Greenberg Traurig LLP in Los Angeles said of his clients who are private-equity managers. "They're going to want to cash in by year end."

About 90 percent of clients already have used the current generous exemption for non-taxable gifts, said David Wilfert, a wealth adviser in the group serving private-equity managers at New York-based JPMorgan Chase & Co.'s private bank. "This client base has been extremely focused on using their $5.12 million exemption," said Wilfert, who is also a managing director.

Legislation enacted in 2010 raised the lifetime estate-and-gift tax exclusion for 2011 and 2012. The opportunity for individuals to transfer as much as $5.12 million — or $10.24 million for married couples — free of estate taxes and gift taxes is set to expire Jan. 1 and drop to $1 million for 2013.

Gift Taxes

Congress returns to Washington this week with about a month until the current estate and gift tax rules expire. Those taxes may be addressed as part of negotiations over the so-called fiscal cliff, or $607 billion of tax increases and federal spending cuts set to kick in automatically in January. Republicans and Democrats disagree on what to do to avert the tax and spending changes.

Private-equity managers' gifts to relatives typically include a low-valued "vertical slice" of their general partner interest in a fund, which includes a piece of their carried interest, Wilfert said. That way, if the investment does well, it would appreciate in a trust free of estate and gift taxes.

Today, with the risk of the exemption shrinking, clients are taking an opposite approach. To reach that ceiling and place assets into trusts before Dec. 31, he said, they are using cash, securities or real estate.

Grantor Trusts

One strategy is to set up the trusts as so-called grantor trusts, said Hunter Payne, partner and general counsel at Harbour Capital Advisors in McLean, Virginia. Those types of trusts often allow the creators to swap initial assets for ones of equal value later, such as investments in a family partnership that's funded with proportionate shares of private-equity fund interests, Payne said.

This year's presidential campaign focused attention on the taxation of private-equity managers as Republican nominee Mitt Romney, the former chief executive officer of Bain Capital, built his wealth in the industry. Romney's 2011 tax return showed he paid a 14.1 percent federal tax rate on $13.7 million of income because much of his income was taxed at preferential rates.

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