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The Beauty and the Beast of the Estate Tax Rules

| Feb 14, 2013 | Uncategorized |

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With the passage of the American Tax Relief Act of 2012 (ATRA), Congress finally made the estate tax rules permanent.

We certainly have been through some uncertain times regarding estate taxes over the past several years. From changing exemption amounts, to a one-year repeal, to “band-aid” fixes, the only thing certain about the federal estate tax was its uncertainty.

Until now.

Congress finally gave us permanent estate tax rules; and by permanent, I mean that except for a built in inflation factor for the estate and gift exclusion, the provisions don’t expire or change with the passage of time.

Interestingly, despite its potentially onerous tax bite, the federal estate tax remains largely a voluntary tax. As Forbes points out in a recent column, “Want to Avoid the Estate Tax Cliff? Five Ways to Help,” the new provisions still allow savvy planners to substantially reduce, or even eliminate, federal estate taxes — even on estates that far surpass the $5.25 million exemption.

Forbes goes on to list five powerful strategies for reducing federal estate taxes:

Gifting. The new provisions allow you to make tax-free lifetime gifts up to an amount equal to the federal estate tax exemption, currently $5.25 million. Straightforward gifting of assets while you are alive removes them — and their future growth or appreciation — from your estate tax-free.

Discounting. There are still a myriad of techniques that can be used to discount the value of stock for transfer purposes. These techniques center on lack of control/minority interest and/or lack of marketability, and can create a substantial valuation discount.

Loans. Family business owners can take advantage of historically low interest rates for loans used to execute sales of stock. As Forbes points out, “currently, a parent can sell shares of the family-owned business to the child for a fixed long term interest rate as low as 2.52%, and not incur a gift tax because of the loan rate.”

Insurance. Properly purchased and owned, life insurance can be used to provide the cash needed to pay any federal estate taxes that may remain after other planning strategies are exhausted. Remember, the cash-call on federal estate taxes is due within nine months of the business owner’s death.

Charitable Giving. If the family is not interested in the business, but is interested in the wealth it has generated, a charitable gift of a business interest may be a savvy way to dispose of the business while also saving on taxes. As Forbes points out, “there are still a number of tax-smart ways to transfer the business to a nonprofit organization, and fulfill your estate planning goals.

The beauty of the new estate tax rules is their permanence. The beast is their sting — 40 percent on the first dollar over the exemption amount (currently $5.25 million). Failure to wisely plan for a potential estate tax liability can be disastrous for your family and/or your business.

For more information, please visit my estate planning website.

With the passage of the American Tax Relief Act of 2012 (ATRA), Congress finally made the estate tax rules permanent.

We certainly have been through some uncertain times regarding estate taxes over the past several years. From changing exemption amounts, to a one-year repeal, to “band-aid” fixes, the only thing certain about the federal estate tax was its uncertainty.

Until now.

Congress finally gave us permanent estate tax rules; and by permanent, I mean that except for a built in inflation factor for the estate and gift exclusion, the provisions don’t expire or change with the passage of time.

Interestingly, despite its potentially onerous tax bite, the federal estate tax remains largely a voluntary tax. As Forbes points out in a recent column, “Want to Avoid the Estate Tax Cliff? Five Ways to Help,” the new provisions still allow savvy planners to substantially reduce, or even eliminate, federal estate taxes — even on estates that far surpass the $5.25 million exemption.

Forbes goes on to list five powerful strategies for reducing federal estate taxes:

Gifting. The new provisions allow you to make tax-free lifetime gifts up to an amount equal to the federal estate tax exemption, currently $5.25 million. Straightforward gifting of assets while you are alive removes them — and their future growth or appreciation — from your estate tax-free.

Discounting. There are still a myriad of techniques that can be used to discount the value of stock for transfer purposes. These techniques center on lack of control/minority interest and/or lack of marketability, and can create a substantial valuation discount.

Loans. Family business owners can take advantage of historically low interest rates for loans used to execute sales of stock. As Forbes points out, “currently, a parent can sell shares of the family-owned business to the child for a fixed long term interest rate as low as 2.52%, and not incur a gift tax because of the loan rate.”

Insurance. Properly purchased and owned, life insurance can be used to provide the cash needed to pay any federal estate taxes that may remain after other planning strategies are exhausted. Remember, the cash-call on federal estate taxes is due within nine months of the business owner’s death.

Charitable Giving. If the family is not interested in the business, but is interested in the wealth it has generated, a charitable gift of a business interest may be a savvy way to dispose of the business while also saving on taxes. As Forbes points out, “there are still a number of tax-smart ways to transfer the business to a nonprofit organization, and fulfill your estate planning goals.

The beauty of the new estate tax rules is their permanence. The beast is their sting — 40 percent on the first dollar over the exemption amount (currently $5.25 million). Failure to wisely plan for a potential estate tax liability can be disastrous for your family and/or your business.

For more information, please visit my estate planning website.

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