Over the past several years, weâ€™ve seen estate taxes go through many alterations.Weâ€™ve seen changed exemption amounts, a one-year repeal, and â€œband-aidâ€ fixesto name a few. In fact, the only thing certain about the federal estate tax wasits uncertainty.
Congress finally gave us permanentestate tax rules; and by permanent, Imean that except for a built in inflation factor for the estate and giftexclusion, the provisions donâ€™t expire or change with the passage of time.
Interestingly, despite its potentially onerous tax bite, the federalestate tax remains largely a voluntary tax. As Forbes points out in a recent column, â€œWant to Avoid the Estate Tax Cliff? Five Ways toHelp,â€ the new provisions still allow savvy planners to substantiallyreduce, or even eliminate, federal estate taxes -- even on estates that farsurpass the $5.25 million exemption.
Forbes goes on to list five powerful strategies for reducing federal estate taxes:
Gifting. The new provisions allow you to maketax-free lifetime gifts up to an amount equal to the federal estate taxexemption, currently $5.25 million. Straightforward gifting of assets while youare alive removes them -- and their future growth or appreciation -- from yourestate tax-free.
Discounting. There are still a myriad of techniques thatcan be used to discount the value of stock for transfer purposes. Thesetechniques center on lack of control/minority interest and/or lack ofmarketability, and can create a substantial valuation discount.
Loans. Family business owners can take advantage of historically lowinterest rates for loans used to execute sales of stock. As Forbes points out, â€œcurrently, a parent can sell shares of the family-owned business to thechild for a fixed long term interest rate as low as 2.52%, and not incur a gifttax because of the loan rate.â€
Insurance. Properly purchased and owned, lifeinsurance can be used to provide the cash needed to pay any federal estatetaxes that may remain after other planning strategies are exhausted. Remember,the cash-call on federal estate taxes is due within nine months of the businessowner's death.
Charitable Giving. If the family is not interested in thebusiness, but is interested in the wealth it has generated, a charitable giftof a business interest may be a savvy way to dispose of the business while alsosaving on taxes. As Forbes pointsout, â€œthere are still a number oftax-smart ways to transfer the business to a nonprofit organization, andfulfill your estate planning goals.â€
Whatwe love about the new estate tax rules is their permanence, but what we donâ€™tlike is their sting -- in the form of 40 percent on the first dollar over theexemption amount (currently $5.25 million). Be sure to plan wisely for yourestate tax liability, or risk being â€œstungâ€ by the rules.
Of course the way to avoid that terrible sting is to plan now and avoid the punishment later. Remember, good planning is no accident.