Exit Planning and Estate Tax Strategies Until December of 2012
Aug 11, 2011
Exit Planning and Estate Tax Strategies Until December of 2012
On December 17th, 2010 President Obama surprised many in the tax and planning worlds by not only extending the Bush Tax Cuts through the end of 2012 but also expanding those cuts in many ways. The problem with the directive is that it’s time-frame is limited to the end of 2012. Therefore, since most of an owner’s net worth is typically tied up in their illiquid business, and there are unique opportunities for tax-efficient transfers of that business through the end of 2012, all owners are encouraged to review these changes as well as to see if some of the unique strategies that are available are applicable to your overall estate and exit planning.
Taxes and The Privately-Held Owner
The government’s tax structure can be onerous to business owner wealth. Unlike privately-held businesses that need to complete in a marketplace in order to generate revenue, the government funds its ongoing operations through the imposition of taxes. There are essentially two (2) types of taxes, those paid during our lifetimes such as income taxes and taxes on [certain] gifts as well as taxes paid at our deaths, including estate taxes.
Also note that taxes are levied at both the federal and state levels. This newsletter addresses the federal tax changes.
What Changed and What Stayed the Same?
Some of the highlights of the Bush Tax Cuts were the lower income tax rates and the preferential federal capital gains tax rate of 15%. Also, the Bush Tax scheme included an increasing limit by which more and more assets could pass free of tax for those who died in certain years.
In 2009 the estate tax limit was at $3,500,000. President Obama raised this limit to $5,000,000 per person with the Dec. 2010 changes.
In 2010 the amount that an individual could gift in their lifetime was $1,000,000. Any amounts over this limit would be taxed at the gift tax rate. President Obama raised this limit to $5,000,000 until the end of 2012.
Practical Implications of These Changes for Exiting Owners
Knowing that more assets can be gifted free of tax until the end of 2012 may encourage you as an owner to begin to look at some advanced planning strategies today in order to move more of your wealth to your intended beneficiaries with minimal or no tax consequences. More importantly, if you take a long view of your planning of your wealth, you may realize that the current limits for these gifts may not only go away at the end of 2012 but these types of limits may never be seen again. The reason that these limits may not come back again is because the United States is on the verge of defaulting on some of our own debt due to our overall deficits. Logic holds that the country will need to raise more revenue to fund these debt obligations. And, as stated above, the government raises revenue through a combination of increasing taxes and/or eliminating certain benefits that reduce tax revenue. Therefore, the tax benefits of increased gift limits are more likely to be reduced and tax rates are more likely to increase in the future – all things being equal - and independent of who is elected President in 2012.
The 2012 Window of Opportunity
So with the higher gifting limits, there are a number of strategies an owner can consider for the transfer of wealth as a part of their overall exit. Although the number and details of these strategies are too great to cover in one newsletter alone, some ideas include:
· Gifting business stock to family members using the increased limits.
· Using the low interest rate environment to look again at strategies such as grantor retained annuity trusts and sales to intentionally defective grantor trusts.
· Taking advantage of the discounts that are allowable for the transfer of minority stake interests in your business as many of these are targeted for elimination as well after 2012.
· Take advantage of the low value of your business in this economic recession to transfer more of it to family and/or sales to managers
· Gift larger amounts of your business to a family limited partnership or other limited liability corporation to maintain control but manage the tax impact of the transfer.
Seek Professional Counsel for Your Customized Plan
The limited list of strategies above are only a few of those available to owners who would like to make estate and tax planning a part of their exit and overall wealth transfer planning. These strategies require the delicate touch of an estate planning professional who is experienced in these areas and can make the plans work to meet your overall goals.
It is also very important to consult with your exit planner and to measure your own personal financial readiness for an exit before you begin gifting away assets that you may need for your lifestyle.
Concluding Thoughts
Done properly, the transfer of wealth in a tax-efficient manner can be a great tool to help you preserve both your business wealth and your legacy. Hopefully, you can use these limited opportunities as a catalyst to your own exit planning and begin to look at some of the more complex plan designs that are forward thinking, include your next set of owners of the business, and are ready to be implemented before 2012.
We hope that this newsletter serves as such a catalyst. Always remember that the government has a plan for your wealth even if you do not.
© Copyright 2011 Pinnacle Equity Solutions, Inc.
