Estate and Succession Planning

Recent uncertainties in estate tax regulations have presented a challenge to taxpayers and their advisors as to the best approach to succession and estate planning.  We’ve determined that what has worked in the past may not be the best option in the current climate.  Waiting to see what the estate tax rules are at the end of 2012 can be tempting, but doing so could be a costly decision. 

Creative planning that allows for flexibility in the future will be more important than ever. 

Changes Brought by the 2010 Legislation

In December 2012, Congress increased the federal estate tax exemption for 2011 and 2012.  The new law includes three significant provisions that may impact the design of your estate plan:

• $5,000,000 exemption amount.  Each individual can pass up to $5,000,000 of wealth to their heirs estate tax free. Amounts over $5,000,000 are taxed at a 35% rate which is more generous than many estate planners anticipated.
• Full step up in basis. The income tax basis of most assets owned at death receive a step up to fair market value.
• Portability. This is a new concept for married couples. Any portion of the estate tax exemption not utilized by the first spouse to die can be carried over to the survivor by filing a timely federal estate tax return.

This 2010 legislation is set to expire as of 12/31/2012.  At that time, legislation will revert back to a $1,000,000 exemption amount and a 55% top estate tax rate unless Congress enacts other legislation effecting estates and their tax liabilities.

Is It Time To Review Your Will?  The Impact of Portability on Your Estate Plan

If you are married and your combined net worth is less than $10,000,000 you may no longer need to be concerned about your family paying estate taxes when you die. The portability provision helps to insure this regardless of when or to whom the family wealth is transferred.

Your current will may incorporate a complex trust arrangement that was necessary under prior law to insure that a married couple could utilize both estate tax exemption amounts at their respective deaths. With the portability election available for 2011 and 2012, these complex arrangements may no longer be needed as a part of your estate plan. All of your wealth can transfer to your surviving spouse without concern about losing the exemption.

The new legislation may also impact how couples hold title to their assets. If the transfer of your assets directly to your surviving spouse at your death was not desirable under the old law, it may have impacted how your assets are titled. With portability, those concerns may be eliminated. If that is the case, you may want to look at how your assets are owned.  This may allow you to simplify the process to transfer them at the time of your death.

If you developed an estate plan under prior law, now may be the time to meet with your estate planning advisor for an update. While tax changes rarely result in simplification for taxpayers, you may be pleasantly surprised in this case.

Where Should I Start?

The conversation should begin with the key owners in the operation – maybe it’s just you, maybe you and a spouse, or you and a few other owners.  From there, include all family members in an open discussion. 

When it comes to determining the succession plan of your business, you will need to consider how it affects those that are important to you.  Some family members may or may not be engaged with the day-to-day operations.  How do you determine what is equitable and fair? 

The success of a succession plan is influenced by the amount of communication among key stakeholders and family members.  Begin by gathering information from family members as to their interest in participating in the family business, which role they are interested in filling, the investment they are willing to make in the organization and any questions or concerns they may have about the future of your business. 

From here, you will have a good foundation of information to begin discussions on the future of your family-owned business.  Ultimately, the decision of what happens with the business is the owner’s responsibility.  However, getting everyone on the same page will increase the likelihood that your operations continue on as you wish it.

What will the future bring?

While new estate tax legislation is not expected to surface until late 2012, we must always think ahead when planning the succession of a business.  More than ever, it will be important to understand your tolerance for potential future tax pain.  You will need to work with your advisors to create the plan that is right for you.  Flexibility and creative planning will be key.