With depressed valuations and advantageous capital gains rates, now is an ideal time to transfer all or part of your business to the next generation.
“There are several techniques that estate planners can use in order to accomplish transfers of interest, and they are all based on taking advantage of the current tax and economic environments,” says John T. Alfonsi, CPA/ABV/CFF, CFE, CVA, a managing director of Cendrowski Corporate Advisors LLC.
Smart Business spoke with Alfonsi about the current tax environment and why now is an opportune time to gift or transfer your business.
What is happening in the area of estate tax reform?
As it stands right now, the estate tax is going to be repealed for 2010, meaning that when people die, their estate will not owe any estate tax. For 2009, there is a $3.5 million estate tax exclusion — the first $3.5 million is tax-free and anything above that is taxable. In 2011, it is expected that there will be a $1 million estate tax exclusion and a maximum 60 percent tax rate (including surcharges).
Again, this is all being discussed and hashed out right now. The majority of pundits believe that we won’t have a zero percent estate tax in 2010. We won’t go back to where we were before, though; some kind of happy medium will be found.
How will gifting be affected by estate tax reform?
Right now, the annual gift tax exclusion is $13,000 per person, per year, and it looks like it will remain that way through 2010. Included in the $3.5 million estate tax exclusion for 2009 is a $1 million lifetime gift tax exclusion. So people can take advantage of that $1 million exclusion and still have $2.5 million left over to avoid or mitigate estate tax.
Also, part of estate tax reform could include the elimination of discounts when calculating the fair market value of closely held businesses. Typically, discounts are given due to a lack of marketability or a lack of control. If you were gifting a minority interest in a business, those discounts could have been significant and reduced the value, which would have allowed you to gift away more or not use as much of the gift tax exclusion.
With the possibility of those discounts being taken away, it’s best that you take care of your gifting now, while you can still get the discounts. If you do take advantage of these discounts, make sure they are documented and calculated by a valuation professional.
