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Time is now to start planning for 2013 changes in estate tax

By: Kevin La Mont

April 20, 2012

It’s early in the year, and already I’m receiving calls from business owners associated with the plastics industry asking, “What will happen with the estate and gift tax at the end of the year?”

Although no one knows with any certainty what 2013 will bring, we do know there has never been a better opportunity for business owners to engage in estate tax/business succession planning.

Under current law, the estate tax exemption is scheduled to drop significantly, from $5.12 million per person ($10.24 million between husband and wife) to $1 million in 2013. In addition, the estate tax rate is scheduled to jump from a high of 35 percent to as high as 60 percent, in some cases.

Although most business owners like the idea of executing an estate tax/business succession plan, many have fears and concerns, such as losing control or running out of money. Both can strike panic in the mind of the business owner, but a good plan will provide the required flexibility to remove an asset from the estate while at the same time allowing the business owner the right to occupy, enjoy, use, retain income and maintain control of the asset during his or her lifetime. Just because one gives away the tree does not mean they have to give away the fruit. 

This flexibility is accomplished by recapitalization of corporate stock into voting and non-voting shares and only repositioning non-voting stock; the use of a grantor retained annuity trust, where the grantor retains control of the asset for a set number of years; the implementation of a defective grantor trust; or a combination of all three.

If done correctly, not only will the business owner maintain control during his/her lifetime, but the business will be protected from lawsuits, bankruptcies and divorces for generations to come. 

If you have children in the business, you may want to consult an adviser to identify what tool works best in accomplishing your goals and objectives.

La Mont is director for advance planning and investments at RB Capital Management LLC in Newport Beach, Calif.