The remainder of 2012 presents a significant opportunity to gift assets and take advantage of unprecedented tax benefits. With the increase in the gift tax and generation-skipping tax (GST) exemptions to $5,120,000, wealthy individuals should be having serious discussions about whether it makes sense to take advantage of this window of opportunity.

There’s no time like right now to make small to large gifts, without shouldering a gift tax burden, and time is of the essence because the window may be closing.  The gift and GST exemptions are set to expire on Dec. 31, 2012 — and no one is sure what 2013 and beyond hold, given the uncertainty of an election year. It is possible that gifting opportunities at this level will not be available after the New Year.

“We know what the law is today and what we expect the law to be for the balance of 2012, but next year, after the election, today’s gifting opportunities could go away,” says David Heilich, principal, tax services, Brown Smith Wallace, St. Louis, Mo.

Smart Business spoke with Heilich about estate tax planning tools that wealthy individuals should consider before the increased exemptions potentially expire at year end.

What gifting tools are advantageous for wealthy individuals right now?

In 2011, there was an increase in the gift exemption from $1 million to $5 million, which was adjusted for inflation in 2012 to $5,120,000. This is a significant increase, since in 2010, the gift limitation was $1 million.

Additionally, there is the GST exemption of $5,120,000 that allows an individual to transfer wealth to generations beyond children, to grandchildren and future generations. Essentially, the GST exemption protects those assets for a longer period of time before the IRS can assess an estate transfer tax. The ability to make large gifts without paying gift tax to  a trust for the benefit of future generations is a significant opportunity that could expire after Dec. 31, 2012. After this point, the exemption will ‘sunset’ because the Tax Reform Act of 2010 only changed the law for 2010-12, and the estate, gift and GST tax laws could revert back to the 2001 law of $1 million estate, gift and GST exemptions with a maximum tax rate of 55 percent, compared to today’s 35 percent.

Who should consider taking advantage of gifting before year end?

Anyone with assets worth $5 million or more, depending on their age and type of assets, should be having serious discussions about their current estate and their motivations and desires for their wealth. Other factors to take into account are potential inheritances, small business appreciation, earnings potential and charitable intentions. Consider both your net worth today and your potential net worth in the future. Make sure you know how to best use today’s estate and gift tax vehicles.

What steps are necessary to execute a gift before the close of 2012?

The critical first step is — don’t wait to act. It’s not too late, but time is of the essence with estate planning. It’s not an overnight process, although it is possible to accelerate planning in order to get gifts in place before Dec. 31, 2012.

When you meet with a qualified estate planning adviser, he or she will first provide education about the laws. From there, a snapshot of the net worth of the estate is gathered, boiling it down to a one-page summary of assets and liabilities. Many times, individuals do not realize how much they are really worth until going through this exercise.

During this time, the adviser will review the current estate plan and the assets of the estate. It is important to understand all trusts (revocable and irrevocable) and entities that are in place, along with a review of any current life insurance policies, and to make sure your health care directives, durable powers of attorney and beneficiary designations are in line with your wishes.

After you create an estate plan, it is important to review your estate plan annually, as well as  upon any important ‘life events,’ and update the plan as necessary. This is all part of the process of determining how and what to gift before the end of 2012 and creating an estate plan that accomplishes your goals and desires.

What is an example of how gifting can work if planned properly?

For those who have not taken full advantage of their life exemptions and for whom it makes sense to make a lifetime gift, a wise gifting vehicle is an Irrevocable Trust. This vehicle allows the client to make gifts to a trust and allocate the GST exemption.

In essence, there are two pieces to the gifting puzzle: a gift to the trust, and if the trust includes grandchildren, the potential to apply the GST tax exemption when filing the gift tax return. Ultimately, this means the client is able to transfer the assets today without paying current gift tax and move all of the appreciation out of their estate. If the succeeding generation leaves the assets in trust, those trust assets could potentially be free of estate tax in perpetuity. However, keep in mind that this is just an example of how gifting can work, and it is important to understand a client’s assets and goals before creating a plan.

What other gifting tools can relieve tax burdens at this time?

Another component of gifting is the annual exclusion — think of this as a ‘freebie’ from the IRS. You can give $13,000 individually to anyone (and married couples who consent to gift split can gift up to $26,000 to anyone). The annual exclusion gifts are not added back to your estate and are a simple way to transfer assets to the next generation.

No one knows what 2013 will bring, but we do know that right now the window is open, and it is a great time to review and update your estate plan and consider taking advantage of these unprecedented opportunities.


David Heilich is Principal, Tax Services at Brown Smith Wallace in St. Louis, Mo. Reach him at or (314) 983-1273.

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Published in St. Louis

Interest rates are at historic lows. Market values of many assets are lower than they were a few years ago. This juxtaposition creates potentially significant wealth transfer opportunities.

“The interest rates for loans to family members and related party transactions are lower than they have been in several decades,” says Brian J. Jereb, a member with McDonald Hopkins LLC. “These rates set the valuation rate used to determine the value of property transferred in certain types of gift strategies.”

In the valuation process, this is the assumed rate for valuing the taxable gift component. This rate is often referred to as the “hurdle-rate” in terms of the rate of return required for the strategy to perform as well as the valuation projection for tax purposes.

“While relative investment rates of return are low, the assumed rate is fixed at the time of the transfer, so when rates of return increase to more normal levels and market values increase as a result, the chance for success of these strategies should be greater than under normal circumstances,” Jereb says.

This juxtaposition also occurs at a time when the lifetime gift tax exemption is at an all time high of $5 million, which allows for larger taxable gifts while still having enough left to cover estate taxes or gift tax.

There are recent rumors that the so-called “Super Committee” could include in its plan a decrease in the gift tax exemption from $5 million to $1 million. “These rumors appear to be based on sheer speculation by various commentators about what the Super Committee may include in its plan if its members are ever able to reach an agreement,” Jereb adds. “By the time this article is published, we may have some indication concerning the possible future of the gift exemption should the committee agree to a plan.”

Smart Business asked Jereb how business professionals can take advantage of these opportunities now, as pending tax reform discussions loom on the horizon.

What is the simplest approach to capture this ‘double-barreled’ opportunity?

The simplest approach is a low interest loan to a family member. The borrower is not burdened by high interest charges and could use the loaned money for his or her desired purposes. If the lender dies, the loan is an asset, but will not disappear. If the borrower is a beneficiary of the lender’s estate plan, the loan balance can be distributed to the borrower or be offset against the inheritance.

What about trusts?

The Installment Sale to a Grantor Trust, sometimes referred to as an ‘Intentionally Defective Grantor Trust,’ or ‘IDGT,’ allows a senior generation member to sell an asset to a trust for the benefit of family members. An IDGT is designed so that the assets therein are treated as being owned by the trust’s creator for income tax purposes under the applicable federal income tax laws. While the assets are treated as owned by the trust’s creator for federal income tax purposes, they are owned by the IDGT and not the creator for federal estate tax purposes. The creator can sell assets to the IDGT without generating income tax; assets sold to the IDGT and appreciation are excluded from the creator’s taxable estate for estate tax purposes.

The IDGT generally benefits the creator’s family members. When the creator sells assets to the IDGT, the trust pays most of the purchase price with a promissory note at the current low interest rates. Because the creator and the IDGT are treated as the same taxpayer for federal income tax purposes, the interest paid on the note is not taxable to the trust’s creator. However, because the creator is deemed to own the assets in the IDGT for income tax purposes, he or she continues to be taxed on the ordinary income and capital gains realized by the IDGT’s assets. The payment of the income tax allows the assets in the IDGT to appreciate without reduction for income tax, and the payment of income tax is not a gift to the beneficiaries because the trust’s creator is merely paying his or her legal income tax liability.

With the low current market valuations, it is more likely than normal that the assets sold to the IDGT will increase in value from their depressed current values, and the current low interest rates make such a sale an efficient planning technique.

Another strategy is the Grantor Retained Annuity Trust (GRAT). Here, the senior generation contributes property to a trust in return for an annuity payment during the term of the trust. The term and the annuity rate determine the amount of the gift to the trust’s remainder beneficiaries. There are two limitations: (1) if the creator of the trust dies during the term, some or all of the trust assets will be part of the creator’s taxable estate and (2) the property transferred could be used up by the annuity payments, leaving no value for the remainder beneficiaries.

How can family-owned businesses benefit?

In the family business context, the low market valuations and the large gift tax exemption make it a good time to recapitalize C corporations with preferred and common shares and in the process make significant gifts to family members. Both C corporations and S corporations can be recapitalized into voting and non-voting shares. The non-voting shares can then be sold to family members or to an IDGT via a low interest rate note back to the senior generation. The current low tax and interest rates also currently provide an ideal opportunity for the business to borrow money to either pay a dividend or redeem shares owned by the senior generation.

How can charitable giving best be structured?

A related strategy with a charitable advantage is a Charitable Lead Annuity Trust (CLAT). In this strategy, the trust pays an annuity to selected charities over a term of years. At the end of the term, if the investment rate of return exceeds the valuation rate, the remainder that is available to the family beneficiaries will be greater than the amount projected using the IRS valuation rate. A CLAT is often used as a vehicle to fund ongoing annual gifts or to establish and fund an endowment gift through the annuity payments.

BRIAN J. JEREB is a member with McDonald Hopkins LLC. Reach him at (216) 348-5810 or

Published in Cleveland

Estate planning opportunities abound for those who are paying attention. Now is the time to sit down with your estate planner to take advantage of tax law that likely will change in the coming year.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 increased the applicable exclusion amount for the estate, gift, and generation-skipping transfer (GST) tax to $5 million from $3.5 million. If Congress doesn’t act, the gifting exemption goes down to $1 million per person on Jan. 1, 2013.

“Those who can benefit from this opportunity should act now before the rate changes,” says Sally Day, director, Crowe Horwath LLP. “This creates significant estate planning opportunities, which need to be acted on as soon as possible.”

Smart Business spoke to Day to learn more about how to take advantage of current estate planning opportunities.

What is the significance of this exemption?

This is a record-setting estate, gift and GST exemption.

Prior to Jan. 1, 2011, the exclusion available to each individual for estate tax purposes was $3.5 million, reduced by the portion of the exclusion previously used to offset lifetime gifts. Before 2011, however, an individual could only use up to $1 million of this exclusion against gifts during his or her lifetime. Therefore, any gifts in excess of $1 million would require that gift tax be paid (at the applicable rate of 45 percent in 2009 and 35 percent in 2010).

Beginning Jan. 1, 2011, the 2010 Tax Relief Act increased the estate tax exemption from $3.5 million to $5 million, but, more importantly, now allows an individual to use up to the full $5 million against gifts made during his or her lifetime. The practical effect of the new law is to allow individuals to gift an additional $4 million during 2011 or 2012 and not pay any gift tax on the gift.

It should be noted that all of these figures are in addition to the ability to gift up to $13,000 per recipient per year without being required to count those annual exclusion gifts toward the $5 million lifetime exclusion.

Why do individuals need to act now?

Unfortunately, the $5 million exclusion is only effective until Dec. 31, 2012. Therefore, individuals who have sufficient assets to provide securely for their living expenses and maintain their current lifestyle should consider making gifts now to use up their $5 million exemption — before the exclusion is reduced in the future. If Congress does nothing before the exemption expires on Jan. 1, 2013, today’s $5 million exclusion will drop back to $1 million, and this window of opportunity will be lost.

The taxable amount of gifts made is measured by the fair market value of the property on the date of the gift, so now is the perfect time to gift away assets that might have a lower fair market value in today’s economy, but have the potential for future growth, such as shares in a family-owned business, units in a family limited partnership, or real estate that has declined in value. After property has been gifted away, not only is the asset itself removed from the donor’s future taxable estate, but the donor is not subject to any additional estate or gift tax on subsequent appreciation on the property.

What does the current GST tax mean for taxpayers?

The 2010 Tax Relief Act also retroactively increased the GST exemption from $3.5 million in 2009 to $5 million for all of calendar year 2010 and through the end of 2012. The GST rate was zero in 2010 but is synchronized with the estate and gift tax rate of 35 percent for 2011 and 2012. Just like the estate and gift tax, the GST portion of the 2010 tax relief act will expire on Jan. 1, 2013, when the GST exemption will revert to $1 million and the GST tax rate will become 55 percent, unless new legislation is passed.

For taxpayers, this means that as they are making large gifts (as recommended above) they should not transfer the assets directly into the ownership of their children, since those assets will be taxed again at the child’s death. Instead, they should consider gifting property either to grandchildren (or other skip persons or more remote descendants) or into a trust that can benefit both the donors’ children and grandchildren without being taxed in the child’s estate.

By properly structuring GST transfers either directly to grandchildren or in trust for their eventual benefit, $5 million of assets can bypass or skip over potential taxation by the donor’s children’s estate.

With the exclusions high and the tax rates low, now is the ideal time for taxpayers to make transfers to their children and grandchildren or anyone else they wish to benefit. It is not known what will happen to the rates when the clock strikes midnight on Dec. 31, 2012, so take advantage of the opportunity while it exists.

Sally Day is a director with Crowe Horwath LLP in the Tampa, Fla., office. She can be reached at or (863) 603-4810.

Published in Dallas

Knowing the value of your business is important for making wise gifting decisions, especially because there could be quite a difference between an organization’s perceived value and its actual value.

“Business owners really should know how much their business is worth so they can determine whether or not to make a gift, and to ensure the amount of the gift is appropriate for their estate plan,” says David Heilich, family wealth planning practice leader at Brown Smith Wallace LLC, St. Louis, Mo.

As a result of the recent recession, lower fair market values have made gifting a much more attractive option, giving business owners the opportunity to leverage closely held stock and partnership/LLC interests, especially when applicable discounts for lack of marketability and lack of control (the so-called minority shareholder discount) further decrease the amount potentially subject to taxes.

At the same time, doing a business valuation sooner rather than later — meaning years before a possible ownership change — can potentially add to the future value of the business when an eventual sale to an outside party is planned.

“Now is a great time to discuss with a professional how to take advantage of estate planning opportunities,” says Cathy Roper, director of financial advisory services, Brown Smith Wallace.

Smart Business spoke with Heilich and Roper about year-end gifting and the benefits of a business valuation.

What year-end gifting opportunities make this an attractive time of year to be generous?

Currently, there is a $5 million gift exemption, which is significantly higher than ever before, and, under the current law, in 2013, the estate, gift and generation-skipping tax (GST) exemptions decrease to $1 million, with the GST exemption indexed for inflation. In 2011 and 2012, single individuals with net worth of at least $5 million, and married couples with net worth of at least $10 million should consider making outright gifts and/or executing various estate planning techniques.

Advisers should take into account the nature of the assets being gifted and projected future values to determine if gifting makes sense and to avoid gifting too much.

How should an individual plan this year, considering the uncertainty of gift laws in 2013 and beyond?

It is unknown when the law in 2013 and future years will be settled, and if there will be any changes to the current law. You don’t want to be paralyzed by the uncertainty of the future. The opportunities in 2011 and 2012 could be lost if you wait until there is better guidance on the current and future estate and gift tax laws.

There are a lot of creative estate and gift tax planning opportunities that provide options and flexibility. Consult with a team of qualified professionals and take into account all relevant factors in order to make an educated decision about whether now is the time to take advantage of gifting opportunities.

How can getting a business valuation years before an ownership change is planned potentially add to the future value of a business?

A business valuation is an opportunity to do a ‘wellness’ check of your business and provides you with the type of dispassionate view a potential buyer will have. The valuation analyst will tell you where your company ranks compared to the industry on a number of different measures such as days outstanding on receivables, capital expenditures as a percentage of sales, gross profit margins, etc., and suggest areas where efficiency and, thus, profitability, can be increased.

Here’s an example: In a recent due diligence engagement in which we were evaluating a software business for a potential investor, we recommended switching from a traditional development model in which a client purchases the software and upgrades as new versions come out to a software-as-a-service model in which the software is leased and the continuous monthly lease payments smooth out the revenue stream and cash flow. This reduces the need for interim financing, reduces income variability and stabilizes the customer base, which reduces risk for a potential buyer. The less risk an investor has, the safer the investment is and the more an investor is willing to pay, or, put another way, predictable cash flow is always more valuable.

What is involved in the process of getting a business valuation?

The process is fairly straightforward, but often takes four to six weeks. First, you will receive a document request list that requires gathering at least five years’ worth of financials on an accrual basis, along with the most current financials. These are reviewed, and your ratios are compared to the industry average.

Once the valuation analyst gets a feel for the industry’s outlook and how the company compares to the industry, he or she will schedule an on-site visit in which owners are interviewed and questions are asked to further assess the company relative to the industry and to its competitors. Documents reviewed may include corporate charters, partnership agreements, minutes and any previous offers to buy the company.

Is it too late to begin the gift planning and valuation processes after the New Year?

Not at all. 2011 is an opportune time to take advantage of gifting opportunities, and a valuation is important to make wise decisions. Under current law, the gift exemption continues through 2012, so the New Year will still provide opportunities to continue estate planning and reap benefits from current estate, gift and GST exemptions.

David Heilich is family wealth planning practice leader at Brown Smith Wallace. Reach him at (314) 983-1273 or dheilich@  Cathy Roper is director, financial advisory services at Brown Smith Wallace. Reach her at (314) 983-1283 or

Published in St. Louis