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

Private Equity Groups - Potential Buyers for Your Business?

It's February - the month of groundhogs, love and presidents.  If you're a business owner, you've probably got more on your mind, especially if you are thinking about buying, selling, or a succession plan for your business.

Recently, we've been talking about the different types of buyers we work with and how the buyer market has changed during the past few years; some good and some "to be determined".  In this issue we talk about the private equity group (aka PEG) of buyers and what that means to sellers of smaller privately owned businesses like yours.  There's been a lot of news recently about PEGs, mostly in a political and tax related context (e.g., Mitt Romney's success as a partner with Bain Capital and the income tax rate he pays). We'll stay away from that.  That's a whole other discussion!
So what is a PEG?

They've been around since the 70s starting as larger, "mega" buyout firms (Bain, etc.)

• They are investors who have private funds (a combination of personal funds and investor funds) to invest and are seeking alternative investment opportunities (i.e., privately owned businesses) where financial returns can "beat the market"
• They buy companies across all industries and usually want a 100% ownership, or at least a majority ownership (51%) in the companies they buy
• They typically buy mature, established companies - not early-stage or startup businesses
• The goal of the PEG is to improve and grow the company with a goal to "exit" their investment in the next 5-10 years, at which time they return the gains to their investors and "close the fund".

What's this mean to you? Here's the change that's going on. In the last 3 years, we've talked with numerous nationally based PEGs who are investing in smaller privately owned businesses. A typical investment opportunity is a company with:

• gross revenues of $2-$20M
• a stable management team
• a growing industry and
• an opportunity to either grow or combine a new opportunity with a similar business they already own

Specifically, the PEGs we've talked to and met with are interested in businesses we represent in the following markets:

• Health care services
• Construction (Homeland Security, IT and General)
• Environmental Analysis
• Engineering
• Distribution
• Food Service

If you are considering selling your business, especially in one of these industries, we believe that, in the right circumstances, PEGs are a legitimate pool of potential buyers that should be considered.

As we've pointed out, the buyer pool is constantly changing and much more diverse than it was 3 years ago. Today's business seller needs to be more aware than ever of how the pool is changing and what impact this has on potential sales opportunities.


If you'd like more information sbout PEGs and how they might be a prospective buyer of your business, please contact me or Ed. Either of us would be happy to talk more about this with you!

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.

Year to Date Commercial Construction Contracts are Down

Commercial Construction contracts for future work through May 31, 2011 are down about 10% from this time in 2010 per McGraw Hill Construction.  More info http://tiny.cc/pzgb5. 

Lending Update in 2011

By John Gibson, Partner

We are hearing that banks say they have money and want to lend it but they can't find enough qualified borrowers. At the same time, borrowers who are looking for loans say their banks are just paying lip service, looking for a way to turn them down.

Who is right? In a way, both are.

Uncertainty and fear have produced cautious bankers. 2011 is a little better than 2010 and much better than 2009. Banks are tip-towing back in, but they are fearful. They are afraid for many reasons. Fear of the unknown. Fear of loss. Fear of federal and state regulators glaring over their shoulders and writing down loans. Even Fear of losing their jobs.

What can you do to improve your chances in this environment?

It's back to basics. Start with the 3 C's; Character, Credit, and Collateral. It takes all three legs for the stool to stand. You have one first impression to win over the banker. Don't give them an excuse to turn you down. You must have a complete loan package. If you don't it will be set aside and you lose critical momentum. Point out the positives and explain the negatives. Answer before asked. All loan proposals have negatives. Letting them know that you aware of yours, not trying to hide them and what you are doing to correct them scores big character points with the lender.

In short, be prepared, stay positive but realistic and don't forget the three C's.