What do business owners need to know about the changes in the estate tax exemption?
There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.
Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.
Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.
As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.
How should existing estate plans be handled?
People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.
While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.
If you have a document that is more than five years old, we recommend talking to your attorney and find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.
While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow, you would still get the right result.
It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?
What other tax implications should businesses consider?
The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.
In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.
Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.
Curt Ramkissoon is the Vice President of Wealth Management Services with FirstMerit Bank. Reach him at (614) 570-7570 or [email protected].
