Estate Tax Planning: The Time Is Now


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What will happen with the estate and gift tax at the end of this year? Although no one knows what 2013 will bring, we do know that there has never been a better opportunity for business owners to engage in estate tax/business succession planning.

Under current law, the estate tax exemption that covers gifts made while alive as well as after death is scheduled to drop significantly from $5,120,000 per person ($10,240,000 between husband and wife) to $1,000,000 in 2013. In addition, the estate tax rate is scheduled to jump from a high of 35 percent to as high of 55% (60% at $10,000,000 due to the phase out of the $1,000,000 exemption). This is important to know because of a simple legal term known as The Grandfather Clause—a situation in which an old rule continues to apply to an existing situation, while a new rule will apply to all future situations. In simple terms, once a gift is made (up to $10,000,000) and a gift tax return is filed, that gift is out of your estate along with any and all appreciation on that asset going forward.

Although these numbers are based on current tax law, there is always a chance that we will see a completely different set of tax laws by 2013. Being that these taxes only affect 5,600 decedents a year; and therefore do not carry much political power, only a real gambling taxpayer would ignore the planning opportunities available before them. What if the $1,000,000 exemption and 55% rate happen!

Although most business owners like the idea of executing an estate tax/business succession plan that will ensure their asset is left to whom they wish, when they wish and in the proportion they want; many have fears and concerns—such as losing control of the asset they have spent their life creating or running out of money.

A well constructed plan will not only provide the required flexibility to remove an asset from the estate for estate tax planning, it will also provide the business owner with the right to occupy, enjoy, use, retain income rights and maintain control of the asset during his or her lifetime.

This flexibility is accomplished by recapitalization of corporate stock into voting and non-voting. Not only does non-voting stock carry any control, it also carries very little value. After all, how much would you be willing to pay for stock in a closely held corporation which possesses no voting rights, no control and cannot compel distribution? The business owner needs to maintain only one share of corporate stock, as long as that one share maintains the controlling interest.

Another benefit of executing an estate tax/business succession plan, which is often overlooked, is the level of asset protection it can provide. If the right trust(s) are used, not only will your plan help reduce and eliminate your estate taxes and allow you the ability to maintain control, it will also create a level of asset protection against claims, judgments and/or possible divorces of your children. Nobody ever said you had to give the asset to your children, just to give the asset to a trust for the benefit of your children. Even though the assets are controlled by the children they are owned by the trust and thus protected.

For Your Information:
RB Capital Management
(949) 861-4362