The Great Recession Provides Planning Opportunities
By: Susan E. Wells and Beth S.
Cohn
You were excited about the opportunity to own your own business
and to become one of many successful entrepreneurs. You took
that fateful leap; put your assets at risk by leveraging them
perhaps beyond your comfort level and worked hard to make your
business a success. Then came "the Great Recession" and now
some of your hard work looks like it is slipping away. There
are silver linings and opportunities in the current economy.
One opportunity is to invest in succession planning now as it may
save you - and your estate - money down the road.
The key goal in succession planning is to ensure that your
money, business and other assets go to who you want them to go
to…your spouse…your children… key employees. Your second goal is to
ensure that your heirs get all of your assets - reduced by the
least amount of estate taxes.
Considering that estate tax rates in 2011- and after- range up
to 55% of your taxable estate, it is advisable to implement some
succession planning measures to minimize your taxable estate upon
death and, therefore, minimize your eventual estate tax
burden.
Under U.S. gift tax law, every individual can transfer $13,000
per calendar year (the annual exclusion in 2010) to another
individual or entity without incurring gift tax. In addition,
every individual can also gift $1 million beyond the annual
exclusion during his or her lifetime. Gifting is still
important even in 2010, when there is no estate tax. In 2011
the estate tax will again become effective.
Among the strategies used to minimize estate taxes is utilizing
the $13,000 annual gift exclusion each year and the $1 million
lifetime gift exclusion by transferring assets. Sometimes
these periodic gifts are effectuated through family limited
liability companies (LLCs), as they may permit the transferor to
maintain control of the asset. For example, your business is
transferred to a family LLC. You retain at least a 51%
interest in the entity and over time gift up to 49% to your
heirs. Each year a percentage of the LLC valued at up to
$13,000 is transferred to each of the intended heirs. In
addition, percentages of the LLC valued at up to $1 million are
transferred to heirs in excess of the $13,000 annual
exclusion. As the transferred asset increases in value, the
heir realizes the incremental value; the incremental increase in
value does not increase the transferor's assets or estate upon his
or her death. Therefore, the appreciation is not subject to
estate taxes.
As a result of the current economy and the decreased value of
your business, you may be able to transfer to your heirs a greater
percentage of your assets than you would otherwise be able
to. The potential estate tax savings in 2011 and after could
be one of the silver linings - and opportunity not to be missed -
of the current economy.
This is a very simple overview of complicated estate tax and IRS
rules. Each person must carefully review their situation and
obtain appropriate tax and legal advice. Our goal is to show
you that through lifetime succession planning, you may achieve your
ultimate goal - your spouse, children, grandchildren or key
employees receiving your business and as a result save estate taxes
and preserve wealth for your family.
About the authors:
Beth S. Cohn is a shareholder at the Phoenix law firm of
Jaburg Wilk. She is a certified tax specialist by the State
Bar of Arizona and a CPA. She assists closely held businesses
and their owners with succession and estate planning.
Susan E. Wells is a partner at Jaburg Wilk were she assists
clients with general business, corporate representation and
franchising.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with
requirements imposed by the IRS, we inform you that, to the extent
this communication addresses any tax matter, it was not written to
be and may not be relied upon to (i) avoid tax-related penalties
under the Internal Revenue Code, or (ii) promote, market or
recommend to another party any transaction or matter addressed
herein.
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