Only four months remain for La Plata County families to act. The Four Corners region is rich with legacy assets including land, farms, ranches, closely held business, gas royalties, mineral interests, and other inter-generational assets. The families and individuals owning those assets may have a limited time to take action in order to preserve them for their beneficiaries and successors.
In late 2010, Congress gave families and small business owners a short-term opportunity to shift up to $5.12 million in assets out of their estates for estate tax purposes and to transition their assets and family businesses to family members tax-free during their lifetimes. For those with sizeable estates or businesses who are interested in ways to reduce the federal transfer taxes, this is a remarkable opportunity. The opportunity is available through the end of 2012 and it could vanish without additional federal legislation.
For years, individuals have been stymied by Congress’ inability to resolve the estate and gift-tax law. The rumor is that the return to a $1 million gift tax lifetime exemption is being discussed by the Joint Select Committee on Deficit Reduction. Additionally, the Obama administration’s proposals include a reversion back to a $1 million gift-tax exemption.
Mark Twain once said, “The political and commercial morals of the United States are not merely food for laughter, they are an entire banquet.” While Congress feasts, the rest of us have to grapple with uncertainty and the increasing likelihood that family wealth and related transfers may soon be taxed at a much higher rate. Given the current climate of rancor and distrust in Congress, this situation appears unlikely to resolve itself in the near future.
Estate taxes are an easy mark for Congress because most Americans do not take the time to put their estate planning in order. Furthermore, our elected representatives know that most of us are guilty of fractured planning at best and count on it to raise funds. Excuses for not planning are numerous; “I forgot.” “I’m too busy.” “I’ll get to it next year.” But the very worst and most inaccurate excuse is, “I’ll wait to see what Congress does with the estate tax law.”
If Congress fails to act, in 2013, the federal tax laws will revert to provisions in effect before the first Bush-era tax cuts were enacted in 2001. Gifts and estates worth more than $1 million would once again be subject to taxes as high as 55 percent. If you act by the end of 2012, there are several opportunities available to avoid this scenario.
With the higher gift tax exemption available until the end of the year, this is a particularly good time to decide who will take the reins of a family business and put the plan into action. Even if business owners do not wish to gift 100 percent of a business in 2012, it may be worthwhile to consider gifts of minority ownership interests in a business to successors.
A current lifetime gift may substantially reduce a family’s estate tax burden. A gift made in 2012 will remove any future appreciation on the gifted asset from an estate, reducing potential estate taxes in the future.
Many donors are concerned about the loss of control and associated income from a gifted asset. In response to these concerns, spouses may design a gift between them so that both can retain significant control over the assets and at the same time enjoy the economic benefits of tax-exempt gifts. A spousal lifetime access trust is one example of a strategy that allows spouses to take advantage of the higher current gift tax exemption and minimize estate taxes for children and grandchildren, while allowing continuing access to the funds.
A donor of a gifted asset may retain some control and an annuity stream from the asset by creating a grantor retained annuity trust to hold the asset. The gift donor retains an annuity stream for a designated period of time, and, provided that the donor survives the trust term, the gifted asset may pass to family members without gift or estate tax consequences.
Charitable-minded donors can benefit by making gifts to charitable lead or remainder trusts. The donor will receive the benefit of associated charitable income tax deductions.
A family that has large real estate holdings may want to consider a family limited partnership for gifting purposes. This opportunity is somewhat complex and should be discussed in depth with a tax professional. With an FLP, certain family members transfer assets into a partnership, and they subsequently give minority interests to other family members, while the donors retain control of the gifted asset.
Numerous other techniques are available to take advantage of the current higher gift tax exemption. The clock is ticking, so it is important to get started. Even though it is still summer, we are already late in the game. Estate and gift planning can take a few months to finalize.
Keep in mind that every situation is different. The nature of your assets, as well as your tax status and goals, are important considerations. This is not intended to be legal, tax or other professional advice for any particular problem, and the readers should not rely upon this article as a substitute for professional consultation.
Paul L. Gervais is the founding principal of the accounting firm of Gervais and Associates, P.C. Charles C. Spence is an associate attorney with the law firm of Maynes, Bradford, Shipps & Sheftel.