Proactive Estate Planning Starts Today

It’s common for manufacturers and distributors to be family-owned. Unfortunately, it’s also common for owners to let estate planning fall by the wayside, causing family members to lose out on tax-saving opportunities. This article discusses the latest tax rates and exemptions and takes note of strategies that may be useful when transferring wealth and management responsibilities to the next generation.

The American Taxpayer Relief Act of 2012 (ATRA) brought some certainty to estate planning, but the current calm could be disrupted by future tax reform efforts on Capitol Hill.  If you haven’t recently reviewed your plans for transferring wealth and management responsibilities to the next generation, now is the time to do so.

Under ATRA, the top gift and estate tax rate is now 40%. The law also permanently sets the gift and estate tax exemption at an annually inflation-adjusted $5 million. For 2014, it’s $5.34 million. As a business owner, you can transfer up to that amount tax-free to your heirs while you’re alive and bequeath any remaining exemption tax-free upon your death.

The same tax rate and exemption amount apply to the generation-skipping transfer (GST) tax. Generally, this tax is assessed — in addition to the gift or estate tax — on transfers to grandchildren and others more than one generation below you.

The annual gift exclusion remains unchanged at $14,000 per donor and recipient in 2014. In other words, a married couple can gift up to $56,000 to their son and daughter-in-law ($28,000 combined times two recipients) tax-free without using up any of their gift and estate tax exemption. Annual exclusion gifts are also excluded from the GST tax. In addition, you can pay unlimited medical and tuition expenses on behalf of family members without incurring gift tax, if you make the payments directly to the medical provider or qualifying educational institution.

The unlimited marital deduction for wealth transfers between US citizen spouses remains unchanged. But ATRA made the “portability” of the estate tax exemption between spouses permanent, too. This means that, if one spouse dies with part (or all) of his or her exemption unused, the estate may elect to permit the surviving spouse to use the deceased spouse’s remaining exemption. (Note: Portability doesn’t apply to the GST tax exemption, and some states don’t recognize portability.)

Say a retiring plastics manufacturer decides to sell his business to the management team for $5 million in upfront cash and $2 million per year for the next five years. Under the marital deduction, all of the sale’s proceeds could be transferred to a surviving spouse estate-tax-free upon the business owner’s death.

Some family business owners aren’t ready to hand over the reins to their heirs just yet. They want time to groom the next generation to run the show. Various estate planning tools, such as family limited partnerships and certain trusts, help balance the transfer of wealth with the retention of managerial control.

Before you can decide which estate planning tools to use, however, you need to know how much your business is worth. Minority interests in small to midsize companies may be subject to discounts for lack of control and marketability that only a qualified business appraiser knows how to quantify and support. Market values also fluctuate as the economy ebbs and flows, so you’ll need regularly updated business appraisals to ensure your estate plan continues to make sense.

A financial plan may also be in order, to ensure you keep enough assets to support you in your retirement years.

Business owners who neglect estate planning risk leaving behind a significant tax bill when they die. Your business interest is probably your biggest asset. Protect it — and your loved ones — by contacting Aldrich about estate planning today.