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Estate and Trust July 2011

Estate and Trust July 2011

Two-Year Window For Gift Tax Planning Opportunity

Schedule an appointment before the two-year window closes

On December 17, 2010, President Obama signed into law, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “TAX RELIEF ACT”). The Tax Relief Act provides a temporary two-year extension of many Bush-era tax cuts, including federal gift tax relief.

The TAX RELIEF ACT makes the following changes to the gift tax system for the calendar years 2011 and 2012:

  1. The estate and gift tax exemption now are reunified so that everyone now has a lifetime gift exclusion amount of $5 million per person. Taxpayers who have already used their pre-2011 $1 million gift tax exemption now have an additional four million dollars to give free of any gift tax. The top marginal gift tax rate has been reduced from 55% to 35% for gifts over five million dollars.
  2. The Tax Relief Act also provides for “portability” between spouses resulting in a maximum exemption of $10 million for a married couple.
  3. For gifts made in 2011, the Generation Skipping Tax (GST) exemption is also $5 million. The exemption is indexed for inflation beginning in 2012. The GST tax rate for 2011 and 2012 is 35% to consider with the gift tax rate.
  4. The Tax Relief Act does not limit any existing estate planning discount vehicles, such as Grantor Retained Annuity Trusts (GRATs), Family Limited Partnerships (FLPs) and/or Intentionally Defective Grantor Trusts (IDGTs).

In order to take advantage of the new increased gift tax exemption, taxpayers should consider making larger gifts in 2011 and 2012. Since the Tax Relief Act is temporary and only in effect for two years, it may be that the additional $4 million lifetime exemption will only be available in 2011 and 2012. In fact, if action is not taken by Congress to extend the current law beyond calendar year 2012, a $1 million exclusion amount will return for calendar year 2012, a $1 million exclusion amount will return for calendar year 2012, along with a maximum marginal gift tax rate of 55%.


New Jersey estate tax returns are required, and taxes paid, only if the decedent’s estate has a value greater than $675,000 at death. Although the $675,000 is referred to as an exemption, it is not a true exemption, but really a filing threshold to file a New Jersey estate tax return. For example, if your estate at death was valued at $675,001, you would subsequently be subject to tax on the total value of the estate and not just one dollar over the exemption amount. This treatment did not change because of the Tax Relief Act, but because New Jersey has no gift tax. A lifetime gift, no matter the amount, does not create a New Jersey gift tax.

“The gift tax relief in the new law is substantial, but it is temporary. Therefore, you should begin to consider how to take advantage of potential “use it or lost it” opportunity.”

Circumstances for gifting have never been better than they are now. Under the new laws, we have a $5 million unified estate, gift and GST exemption and a 35% tax rate. Add to that historically low interest rates, relatively low asset values and no restrictions on the use of effective planning tools, such as GRATs, FLPs, and IDGTs, for gifting to grandchildren and/or valuation discounts on family business.

A Grantor Retained Annuity Trust (GRAT) involves putting appreciating assets, at discounted values, into a short term irrevocable trust and retaining the right to receive the income. As long as you survive the trust term, any appreciation is out of your estate. Rewards are built in for any returns in excess of IRS dictated interest rates. This technique also has the IRS blessing so there is no transaction risk.

Gift techniques that also use discounted values include the use of Family Limited Partnerships (FLP), creating opportunities for estate tax savings and methods of improving family financial literacy. For example marketable securities, closely held business interests or real estate can be placed into a FLP with shares gifted to family members with limited rights. The FLP share’s value is discounted (usually around 30%) using less of the gift tax exemption. This creates a vehicle for centralized management of the family’s wealth and opportunities for family members to become aware of what is going on.

A Qualified Personal Residence Trust (QPRT) removes the primary residence or vacation home from the grantor’s estate and permits the grantor to continue using the property for a fixed term. This can result in a substantial gift at little or no gift tax cost. The value of the property is also frozen when transferred, thereby allowing any future appreciation in value when the grantor dies to escape estate taxation. This tool is a great choice for those who are reluctant to take a first step toward estate planning. The grantor or family can continue to enjoy the property, and if the grantor survives the term it will eventually pass at greatly reduced valuations.

For the charitably inclined, a Charitable Lead Trust (CLT) might be a choice. Having children or trusts on their behalf as the remainder beneficiaries results in a very low gift for gift tax purposes. The amount of the charitable deduction depends on the length of the term of the charity’s interest, the amount of the annual payout to the charity and the current interest rates. This type of arrangement can be an excellent way to provide a current income stream to a favored charity, with the deferred remainder interest going to the children.

The gift tax relief in the new law is substantial, but it is temporary. Therefore, you should begin to consider how to take advantage of potential “use it or lost it” opportunity. Consequently, any client with a desire to reduce their gift and estate tax should schedule an appointment with us to discuss the best use of the new gift tax rules before the two-year window closes.

Succession Planning for the Transfer of a Business

Bottom Line

Develop the Plan Early

It is improbable that business will last forever. It‘s impossible for its owners. Unless the owner wants their business to die with them, arrangements have to be made for a transition. A business provides ongoing cash flow and a degree of financial security to the owner and their family. Capturing that value should be a major concern of the owner.

Succession planning is not an event. It is a process that establishes new ownership and management and provides the ways and means to put them in place with a reasonable likelihood of success. The transition could be to a successor already working in the business or a new hire that will eventually run the business. When succession planning fails, the company is either sold or liquidated.


Succession planning is an important process that affects the owner, his or her family, employees, customers, suppliers, professionals frequently consulted with, and the landlord. Succession planning requires a carefully thought out plan, or chaos could result and values could be lost.

Succession planning should be done, even if there are no immediate plans to retire as a precaution against unforeseen, unintended and future events.

It is important for the business owner to understand that there are choices. Doing nothing is a choice, and carries with it the natural consequences of that path.


Preparing for transfer to a successor is not much different than preparing for a sale. Critical information needs to be assembled and organized so that the successor and their advisors can do their due diligence. A by-product of preparing is that it makes the owner confront the availability of this information and for them to consider using it to perhaps better operate their business. This includes financial statements, an examination of profit centers, cash flow analysis, a review of the top customers and vendors and the susceptibility to loss if relationships are terminated, geographic coverage, evolving ways business is conducted and an examination of the company’s business model, organization chart and suitable backup.


One of the most difficult aspects of transferring a family business to successor generations is determining the value of the interests to be transferred. There are many issues that arise when determining the value of the subject interests, including the goals and emotions of the buyers and sellers, the financial ability of the buyers to pay for the interests, and the impact on the sale will have on the future expected cash flow of the company. All of these issues tend to lead a sale price based on the perceptions and biases of the participants. However, one must not lose sight of the fact that any transaction between related parties may attract the interest of the Internal Revenue Service.

Transactions between related parties, including the sale of a business interest to a successor generation, must be at a price that is considered arms length. To the extent the transaction is not arms length, the IRS will deem the difference between the transaction price and an arms length price as a taxable gift, inclusive of prohibitive penalties and interest. The IRS recognizes fair market value as the appropriate standard for determining the sale price between related parties. It is advisable to engage the services of a credentialed valuation expert to assist in determining the sale price.


Time is an important element in structuring the transaction. A lot more can be done if five to ten years were available than if it has to be done in one or two years, or less, say if a death or disability is causing the transfer. An orderly transfer can accomplish much more for everyone involved. The longer the time, the easier it will be to train and ease in the successor to a leadership role.

The sooner you start the better.


Transferring stock to the next generation involves many variables, none the least is a method to do it.

A true succession plan involves the sale or transfer of the business to the next generation of owners, be it relatives or long term employees. The needs of the seller have to be balanced against the ability of the business to make the payments. The payments are not just the direct payments to the leaving owner. They could be to a bank, other lender or to a venture capital group that is a co-owner with the designated successors who provided the funds to the business so the retiring owner could get a lump sum payment,.


There are many ways a business can be transferred in connection with a succession plan. Each carries a cost, tax and/or risk consequences and practical considerations. The bottom line is to develop the plan early and work out all the numbers to determine its viability. If you have any questions or would like more information, fill in the form below.

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