While it is fun and interesting to watch other people win and lose money, it is painfully stressful to watch your own money go down the drain. Yet, that is exactly what could happen to you if you fail to take advantage of the tax exemption that Congress has provided. If you and your spouse own assets or businesses with a net worth of over $2,000,000, you could end up paying a substantially more in taxes for waiting beyond 2012 to transfer them out of your estate. This is because the temporary loophole that raised the gift tax exemption from $1,000,000 per person to $5,120,000 per person will expire on December 31, 2012. Simultaneously, the top gift tax rate jumps from 35% to 55%.
Beginning on January 1, 2013, assets gifted over $1,000,000 per person ($2,000,000 for a married couple) will now be taxed at a graduated rate up to a maximum rate of 55%.
But Congress will act to extend the exemption beyond 2012, won’t they? Wanna bet? Say, $5,000,000 on it? That is exactly what you are doing if you fail to act. If your assets or business interests are worth $12,240,000 or more, waiting to act until 2013 will cost you. In 2012, you could have sheltered $10,240,000 of assets. In 2013 you will pay $4,913,000 to gift them. A more modest estate or business interest of $3,500,000 will still save $538,300 in taxes.
But I want to keep control of my business. You can do that too. Convert your stock to voting and non-voting shares. For example, keep 2% of voting stock and give away 98% of the non-voting stock. This allows you to give away value while preserving control.
The simple fact is you cannot take it with you. We are all eventually exiting our business interests and asset holdings. Contact your attorney and accountant to advise you of a proper succession plan. Failing to plan can have devastating financial consequences. Don’t risk forcing a future sale of the very things you have worked to preserve.
Be smart. Take the sure bet now.
Frank A. Wisehart, M.B.A., CPA/ABV CFE, CVA is the Director of Business Advisory Services at Schneider Downs, Columbus, Ohio, an audit, tax and advisory firm that has been in business since 1956. Frank Wisehart has 20 years of experience in business valuation, litigation support, forensic accounting, fraud investigation, transaction due diligence and expert testimony. He may be contacted at (614) 586-7118 or firstname.lastname@example.org
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter