Gift and Estate Tax Changes.....Are You Ready?

Recall the conversation between Robert Hayes and Leslie Nielsen in the movie Airplane?

   Robert Hayes ... "Surely, you can't be serious?"

   Leslie Nielsen .. "I am serious...and don't call me Shirley."

That pretty much sets the stage for this month's newsletter about exit planning:   The "Are you serious?" state of confusion regarding gift and estate taxes.  Arguably, no other area of tax planning has been in such a state of flux. 

One of the most common question business owners ask us is:  

"I am thinking about giving my children an interest in our family business but I'm confused about changes in the gift and estate taxes. For tax purposes should I start gifting my ownership in 2012 or wait until 2013?"  

  

Fair disclosure:   Current thinking is a bit of "Who knows?" but most feel there will be changes to both the amount of the exemption and the estate tax rates that will result in added tax to the current owner.  In a world of no guarantees, it certainly appears that in most circumstances now is the time to gift.

  

Issues regarding gift and estate taxes focus on two key parts:  

  

The Lifetime Exemption Amount

and

Gift and Estate Tax Rates

  

Here's a summary of what we know:

Exemption Amount:

• 2001 - 2010: The lifetime tax free exemption for gifts increased to the current amount of $5M
• 2010 - 2012: The above exemption, $5M, was extended though 2012 (with inflation, $5.12M)
• 2013:  The lifetime exemption will return to the 2001 level of $1M

Tax Rates:

For 2013, the tax rate applied to the portion of gifts that exceed the amount of the lifetime exemption is scheduled to increase from 35% to 55%.

There you have it.  A perfect storm! The amount of the lifetime gift that is exempt will be sharply reduced and the tax rates applied to the amount exceeding the exemption will increase.

Of course there is speculation, and thus confusion, regarding everything from continuing extensions of the current rates to a retroactive adjustment of future rates on gifts given now.  Recent experience indicates that these types of changes are just not predictable.

Our opinion is that the current combination of historially high exemptions and historically low rates make it an ideal time to start the transition planning now while there is still time to implement your plan in a more tax friendly environment.  Waiting until 2013 to start your plan will likely cost you more in taxes.

If you're ready to move forward, one of the first steps is to make sure you have an up-to-date value for the business.

Using the valuation and working with your advisory team, you can determine the best way to structure the ownership transfer. Finally, complete the transfer. Lastly, Happy New Year...smart move!

If you have questions about gift and estate tax planning, feel free to give us a call.  We're happy to assist you in determining a plan that's best for you!

-by Ed Davis, Partner

New Estate Tax Laws, Time to Plan

“One difference between death and taxes is that death doesn't get worse every time Congress meets”.


Will Rogers

Confused about the federal estate rules and regulations? Wonder what the tax rules are? Did George Steinbrenner (owner of the New York Yankees) get it right when he died in 2010…should he have waited? We thought we would recap the current estate and gift tax rules. Note, they only apply for 2011 and 2012 and will change again, maybe. Here you go:



1. The minimum federal estate and gift tax rate is 35%,

2. The “unified tax credit exemption equivalent” is $5m … a fancy way to say that up to $5m in assets can be passed on to heirs either during your lifetime and at death (hence the term unified) without federal taxation,

3. The generation-skipping transfer tax rate is 35% with a $5m generation skipping transfer tax exemption. Many individuals (grantors) who might otherwise leave their entire estates outright to their children will instead allocate their generation-skipping exemptions to “generation-skipping transfer tax exempt trusts” for their children and grandchildren. Potential benefits include:

a. the trust will escape all transfer taxes when the children die and will pass tax-free to the grandchildren,

b. the trust may be protected from the claims of creditors and, to some degree, from claims of ex-spouses. Had the trust property been left to the children outright, the property would be subject to such claims. In some states, property acquired by gift or inheritance from a third party is not subject to division in divorce proceedings and therefore, would not be subject to claims by an ex-spouse,

4. The maximum estate tax unified credit between spouses is now “portable” meaning that a surviving spouse can elect to use any unused portion of the estate tax credit of the predeceased spouse (currently $5m). so, with the right planning, married couples can effectively shield up to $10m in assets from federal estate and gift tax,

5. Estate tax deferral – payments of estate tax attributable to the value of a closely-held business can be deferred for up to 5-years.



Remember, these rules only apply for planning during 2011 and 2012. After that, the rules “sunset” (we think that’s a cute phrase) and revert to the 2001 rules.

Article Authored by Ed Davis.  edavis@ciharvest.com
U.S Treasury Circular 230: Any tax advice included in this written or electronic communication was not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency, nor can this be used for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed herein.