With the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act in November 2010, it appears at first glance that the need for estate tax planning or business succession planning for many may be a thing of the past.
An individual can pass to the next generation, during life or at death, $5 million ($10 million between husband and wife); that is, if you gift or die within the next two years.
Does this mean business owners should wait until 2013 to see what will happen with estate and gift taxes? Absolutely not! Gifting $5 million/$10 million might be the perfect plan, if done right.
There has never been a better time to reposition assets. Here are three ways of doing so, along with pros and cons of each.
* An “outright gift” goes to anyone you choose. Advantages: They are easy and inexpensive, and assets are removed from the estate with no chance of future estate tax exposure. Disadvantages: Assets are subjected to claims, judgments and possible divorces of children. If the asset made income, that too has been gifted. There's no leveraging of the gift, and upon your death, it will not receive a step-up in cost basis.
* A “grantor retained trust” was created to move wealth to children while compressing the gift's value. A GRT works well when grantors want to gift assets of more than $5 million and pay no taxes. Advantages: Assets are removed from the estate for estate tax planning and can be gifted to a dynasty trust, providing asset protection for multiple generations. It's a great way to leverage gifts, the grantor retains rights to income and can receive a step-up in cost basis at death, and there's income tax flexibility. Disadvantages: The grantor must outlive the length of the trust, it's irrevocable (but can be built with flexibility), and no contributions can be made once it's established.
* A “private annuity” is an unsecured promise from an obligor to make fixed payments to an annuitant for life in return for transfer of property from annuitant to obligor. Advantages: Assets are removed from the estate for estate tax planning and can be sold to a dynasty trust providing protection for multiple generations. It's a great way to leverage the sale of assets. The annuitant retains the right to income during life and each payment is looked on as part return of principle, part capital gain and part income. Disadvantages: The annuity is irrevocable, the seller may live longer than expected, income generated off assets may not be sufficient to make payments, and the note is unsecured.
During the next two years, Americans can reposition a greater concentration of wealth than ever before. What works best for you is between you and your adviser. But what I do know is that nobody knows what Congress will do with estate and gift taxes after Dec. 31, 2012.
La Mont is president for advance planning and investments at La Mont Group in Irvine, Calif.