14th May 2011
The new law signed by the President in December gives owners of family businesses probably the biggest tax beak to come along in many years.
That break is the lifetime gift exemption, now $5 Million, for the next two years (2011 & 2012); or $10 Million for a married couple.
While the estate tax amount has been increasing year to year, the lifetime gift exemption amount had stayed at $1 Million for more than 10 years.
If the current law “sunsets” on December 31, 2012 as it is scheduled to do, then the lifetime gift exclusion amount and the estate tax exemption will both decrease to $1 Million.
Even if you had previously used up your $1 Million lifetime gift tax exemption, now you can shift an additional $4 Million out of your estate to your family.
This two year window allows the owners of family businesses to transfer the stock in their closely held companies to the children or other family members and reduce the size of their estates, all tax free.
This strategy raises difficult questions for those now in charge as to how to maintain control and/or a stream of income from the company they currently work in and manage. How do they protect their interests and maintain their retirement while passing wealth down to the family?
Experienced estate planning lawyers can develop “salary continuation plans”, “consulting agreements”, and other legal mechanisms to protect the owner’s financial stake in the family company.
Other difficult questions include how to treat other beneficiaries fairly when only one of the beneficiaries is going to eventually lead the business.
This may mean an amendment to the estate plan. The timing, nature and size of the gifts have to considered in the context of the overall estate plan.
Time may be of the essence in view of the fact that the $5 Million lifetime gift exclusion may disappear at the end of 2012, and go back to $1 Million.
Please contact me if this is a strategic area you are considering in your estate plan.
DWIGHT EDWARD TOMPKINS
Estate Planning Attorney
This blog is intended for informational purposes only and is not intended as a substitute for legal advice from a qualified estate planning attorney in your jurisdiction.