Acting boldly when others are meek can result in very effective estate tax planning. It seems counter-intuitive, but the recent halving of oil prices and a similar bloodletting in natural gas prices present a new opportunity to perform planning at a gentle tax cost for owners of these assets.
Many geologic formations with large production potential have become unprofitable or marginally profitable as energy prices declined. For example, EQT recently wrote down its undeveloped Ohio Utica shale holdings as decreased revenues from expected production made development undesirable.
Estate Tax
Savvy owners facing the estate tax (currently assessed on taxable estates exceeding $5.43 million) should consider gifting distressed assets to a trust or beneficiary now as the gift tax costs of doing so will be significantly reduced. This timing strategy is analogous to the idea of converting a traditional IRA to a Roth IRA during a recession, subjecting account assets to tax at a time when the fair market value of the account may not reflect its intrinsic value.
Income Tax
In addition to estate planning strategies, investors with a relatively high basis in oil and gas or other distressed assets should evaluate tax planning options to strategically dispose of those assets in order to realize a tax loss. This loss can offset capital gain in the current tax year. In addition, individuals can carryforward any unused loss to future years to offset gain until the loss is fully exhausted.
