Your Estate Plans For Your Business: What To Do Now

Barbara Weltman

In light of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act ("Tax Relief Act"), which was signed into law on December 17, 2010, small business owners should review their estate plans now to protect their families and the existence of their businesses.

The good news
The Tax Relief Act reinstated the estate tax through 2012 with favorable new rules. Each person now has an exemption amount of $5 million (it had been $3.5 million in 2009). For married couples, the unused exemption amount in the estate of the first spouse to die is "portable," which means it can be used by the surviving spouse's estate. The full marital deduction, charitable contribution deduction, and the deduction for administrative expenses continue to apply.

The top rate is only 35% (it had been 45% in 2009). This is the same maximum tax rate applied for income tax purposes to individuals and corporations.

The bad news
These favorable estate tax rules run only through 2012. After that year, the estate tax rules are set to revert to the rules that had applied prior to the Bush-era tax cuts. The exemption amount would be $1 million and the top estate tax rate would be 55%.

Of course, it is entirely possible that the current rules will be extended, or that other changes will be made before 2013, but what those changes will be remains uncertain. There are still many who want the estate tax repealed entirely.

What to do
Many business owners have estates that are greater than the exemption amount. In order to ensure that some or all of the business does not have to be liquidated in order to pay the estate tax, planning should be undertaken at this time.

Here are some suggestions about what to do:

  • Work with a knowledgeable estate planner. It goes without saving that good advice can save you and your family a lot of taxes. You'll need a professional who can help craft a flexible plan that can take advantage of current favorable rules (in case of death before 2013) while still providing tax-saving relief after 2012, whatever the estate tax rules may be at that time. If you already have an estate plan in place, it may be necessary or desirable to make changes at this time.
  • Give interests in your business to family members. If you want your business to remain within the family, consider making gifts annually of small interests in your business. Because you retain control, the valuation of the interests can be discounted because the recipients only have minority interests, effectively allowing for more shares in a corporation (or a larger interest in a partnership or LLC) to be transferred free of gift taxes each year. There may be other valuation discounts applicable, such as those for lack of marketability. You can transfer up to $13,000 to each person you want ($26,000 if you are married and your spouse consents to the gift). Note: There had been proposals to restrict valuation discounts, but they were not included in the final version of the Tax Relief Act and are still allowed.
  • Factor in state death taxes. Even if you estimate that your estate is below any federal estate tax levels, your family may still face state death taxes. About half of states have no death taxes (but this could change because of budgetary concerns). The others have varying rules on how much can be transferred tax free, and this limit may be well below the federal exemption amount.

Barbara Weltman, author of several books including her most recent, 1001 Deductions & Tax Breaks 2009
Copyright 2011 Author retains ownership. All Rights Reserved.
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