How to protect assets with year-end gift tax opportunity

David Heilich, Principal, Brown Smith Wallace LLC

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 [email protected] or (314) 983-1273.

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How a lack of recordkeeping and knowledge of asset value can hurt you at tax time

Thomas H. Ahlbeck, CPA, Managing Director, Des Plaines, Ill., office, SS&G

What you paid for your assets and how the Internal Revenue Service values them are not the same considerations, but taxpayers often don’t know the difference.

“This is not the kind of thing you run into every day,” says Thomas H. Ahlbeck, CPA, managing director at SS&G’s Des Plaines, Ill., office. “Some people might only run into this complexity a couple of times in their lifetime.”

However, the wrong basis can add thousands of dollars to your taxes, so it’s important to understand how this can happen, especially as your net worth grows and affairs become more complicated.

Smart Business spoke with Ahlbeck about how to get a handle on this important, but nebulous, accounting concept.

What is basis?

Basis is what the IRS uses as your asset value for determining your gain/loss or taxability of a transaction. For example, if you bought a common stock but don’t know or cannot prove your purchase price, you might have to enter the basis as zero even though you paid significantly more. You’ll pay more taxes on the proceeds you receive — or not be able to write off a loss if the security is worthless.

What is the biggest problem area for figuring basis and how can it be detrimental for your taxes?

Taxpayers are losing a small fortune with nondeductible individual retirement accounts. IRAs can be problematic because you pay thousands of dollars into an IRA and the basis is not easy to track. When people put in after-tax contributions to their IRAs, they might not be keeping track or telling their accountant as it doesn’t have anything to do with their current taxes. Later, unless you can prove those were after-tax contributions, you’ll have to pay taxes on the money again when you take it out.

Once you’re making withdrawals from the IRA, the nondeductible contributions are taken as a percentage of every withdrawal. So, if you put in $100,000 of after-tax dollars originally and the account grows to $150,000, then only two-thirds of that is not taxable and a third of each withdrawal will be taxed.

How is real estate another area where basis is often wrong?

Real estate is another neglected area for basis — particularly primary and secondary residences where accountants aren’t completing a depreciation schedule. Today, many homeowners look at the current market and assume their home will never appreciate. Therefore, they don’t keep records of improvements, which should be added to the basis to narrow any gains when it comes time to sell in 10 or 20 years. This is even more critical for a vacation home because you don’t get the $500,000 exclusion of taxable gain that you might get on your primary home.

Real estate transactions, by their very nature, are held for a sizeable length of time, making it difficult to keep all the records. Your basis can be further complicated because the land and building are held as separate values and the land’s original value is often forgotten when configuring basis for a sale years later. If a property goes through a bankruptcy or debt forgiveness, those also will change the value of the basis.

Another problem is when inheriting or gifting occurs because, again, records can be lost. If someone inherits real estate, the basis value is stepped up to the current market value, which is why an appraisal needs to be done at the time of death. The idea of the increased value, which can happen for no other reason than inflation, is to counteract estate taxes.

However, if a property is gifted, the value of the basis is what the original owner paid for it. Therefore, if a couple jointly own property and one spouse dies, half of the basis will stay at the original purchase price, while the other half will be stepped up to the date-of-death value.

What can you do to prevent some of these difficulties?

The simple rule of thumb is to know the basis of all your assets at all times, meaning what you can use as value against the selling price in the eyes of the IRS. Know what will change the character of an asset, such as when a personal residence becomes rental property. There’s a lot of logic to basis, but with fair market value of property, the contract cost, debt involved, after-tax dollars, inheritance and gifting, the original basis can be confusing and even change without you realizing it.

You also might not recognize the tax consequences of your actions. For example, if you bought a stock for $10,000, you also need to keep track of the reinvestment because it becomes part of the cost to give you a higher basis.

Don’t assume your financial adviser or accountant is tracking basis. If they are, keep an eye on it to ensure they are doing so correctly. Many financial advisers now are tracking basis for stocks and mutual funds, especially with new rules from the IRS, but there can also be basis issues and related loss limitations with a closely held corporation or a partnership.

Know what records you need to have and how long to keep them. When someone gifts you a vacation home, you might not think that you’ll need the paperwork stating what the home originally cost. A lot of people think they only need to save three years of tax records before they throw them out. But as long as the transaction hasn’t been completed, it needs to be tracked.


Thomas H. Ahlbeck, CPA, is a managing director of SS&G’s Des Plaines, Ill., office. Reach him at (800) 869-1834 or [email protected]

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Banks eye AIG’s $47 billion in toxic assets held by NY Fed: WSJ

NEW YORK, Fri Mar 16, 2012 – Several banks including Goldman Sachs have shown an interest in buying American International Group Inc’s. complex and troubled assets tied to the insurer’s bailout, the Wall Street Journal said, citing people familiar with the matter.

The troubled assets, which are held by the Federal Reserve Bank of New York, are valued at about $47 billion at face value, the paper said. These toxic assets were acquired by New York Fed as a part of the AIG bailout at the height of the financial crisis.

Banks including Barclays PLC’s Barclays Capital unit, Credit Suisse Group AG and Goldman Sachs are among the ones interested in buying the complex mortgage-backed assets at around their current market value, the Journal said, quoting people familiar with the matter.

A few interested buyers have approached the New York Fed about the collateralized debt obligations. However, the people told the paper that they do not yet expect any imminent sales.

None of the parties were immediately available for comment when contacted by Reuters.

Chesapeake Energy Corp. targets new asset, debt sales

OKLAHOMA CITY, Okla. – Chesapeake Energy Corp said it would sell off $10 billion to $12 billion in assets and issue another $1 billion in debt to cover its spending this year amid the weakest natural gas prices in a decade.

To bolster its cash flow, the second-largest U.S. natural gas producer has been cutting production from “dry gas” wells and shifting to liquids-rich fields that produce products whose prices are based on that of crude oil.

Chesapeake said on Monday that it would put fields in Texas and Oklahoma as well as some midstream assets on the block and sell its future production in the Granite Wash field.

Investors initially welcomed the announcement. Shares of Chesapeake rose more than 5 percent in early trading, before falling back somewhat.

Chesapeake may find it difficult to get the prices it wants for the assets because of low prices for natural gas, which are hovering near $2.50 per million British thermal units, Brean Murray, Carret & Coone analyst Raymond Deacon said.

The low natural gas prices are also putting pressure on the company’s cash flow.

Analysts have said anticipated cash flows of about $5 billion in 2012 are likely to fall far short of Chesapeake’s spending needs of around $12 billion.

“They need to get those levels more in line,” Deacon said.

Chesapeake shares had slumped nearly 40 percent since their peak in August through last week, hurt by the weak gas prices. The company has promised to trim its debt to $9.5 billion by the end of the year from nearly $14.5 billion at the end of the third quarter.

Last week, Chesapeake said it had cut its gas output by 500 million cubic feet per day and was considering pulling production down by double that amount, a move that could help reduce spending.

Included in the expected deals are sales or joint ventures for the company’s West Texas Permian Basin assets and Mississippi Lime acreage in northern Oklahoma, which will yield $6 billion to $8 billion.

Newfield Exploration to sell more assets this year

HOUSTON – Newfield Exploration Co. said it expects to sell non-core assets worth $335 million early this year to focus on oil-rich properties and is looking at options for its Gulf of Mexico fields.

The company sold $400 million worth of assets last year, the independent oil and gas producer said in a statement.

“We are re-allocating our people and using proceeds from recent asset sales to drive strong oil growth. For 2012, we will direct substantially our entire budget to oil and liquids-rich opportunities,” CEO Lee Boothby said.

The company expects production of oil and liquids to grow more than 20 percent this year and account for half of its total production by second half of the year.

In 2011, Newfield grew its oil and liquids production more than 20 percent, it said.

Newfield is not planning to drill any additional exploratory wells in the Gulf of Mexico. Production at its Gulf of Mexico deepwater division fell 16 percent for the three months ended September, according to a regulatory filing.

Shares of the company were up 1 percent at $38.63 on the New York Stock Exchange on Monday.

Lehman brokerage trustee eyes $18.3 billion payout

NEW YORK ― The trustee liquidating Lehman Brothers Holdings Inc’s. brokerage unit asked a bankruptcy judge for permission to set aside $18.3 billion of assets to be returned to customers beginning early next year.

That payout would represent more than three-fourths of the $23.7 billion of assets that James Giddens, the trustee for the Lehman Brothers Inc unit, said he has under his control.

Of the $23.7 billion, $12.7 billion are securities and $11 billion is cash. Lehman was the fourth-largest U.S. investment bank prior to its Sept. 15, 2008, bankruptcy, the largest Chapter 11 filing in U.S. history.

“The great bulk of the assets that will be available for distribution … are now in hand,” Giddens said in a late Thursday filing with the U.S. Bankruptcy Court in Manhattan. “The trustee would like to be in a position to proceed with interim distributions to customers in early 2012.”

Soon after Lehman’s bankruptcy, Giddens distributed $92.3 billion to benefit customers holding 110,000 accounts. Many accounts were absorbed by Barclays Plc and asset manager Neuberger Berman.

Giddens is also liquidating the broker-dealer unit of MF Global Holdings Ltd, a futures brokerage once run by former New Jersey governor and Goldman Sachs chief Jon Corzine. Customer distributions in that case are a small fraction of those in Lehman’s bankruptcy.

According to Thursday’s filing, Giddens plans to keep $3.07 billion of assets in reserve pending the outcome of litigation with Barclays. The British bank bought much of Lehman’s investment banking business.

Giddens’ request requires approval by U.S. Bankruptcy Judge James Peck. A hearing is scheduled for Jan. 25, 2012.

Peck is also expected at a Dec. 6 hearing to approve Lehman’s reorganization plan. The plan would return about $65 billion to creditors starting early next year. Lehman this week said that plan has overwhelming creditor support.

The multiple uses of business valuations

Jeff Hipshman, Partner, HMWC CPAs & Business Advisors

Is a business valuation needed when you aren’t planning to sell your business? What factors determine a company’s value? What do you need to know before hiring a valuation professional? These are some of the common questions that business owners pose when the issue of a valuation is raised. Since 2011 is expected by some economists to see an increase in mergers and acquisitions activity, it is a good time to review the role of business valuations.

“Valuations are useful in such circumstances as mergers and acquisitions, due diligence by a lender, succession planning, estate planning and complying with government regulations,” says Jeff Hipshman, partner, HMWC CPAs & Business Advisors in Tustin. “Even if none of these trigger events are happening now, it still can be beneficial to have a valuation. A business valuation can impart insights into a company’s strengths and weaknesses, as well as provide a road map for increasing its value. Understanding what adds value to your company can help you in future business decisions, such as timing the sale of your business for the maximum selling price.”

Smart Business spoke with Hipshman about some of the typical questions that business owners ask about business valuations.

Why is a valuation needed?

Valuations can be helpful in many situations, including some you may not have even thought about:

  • You want to buy or sell a business.
  • You are divorcing.
  • You use gifts as a tax strategy in your estate plan.
  • You are liquidating your business.
  • You are the executor of an estate.
  • You are setting up a buy-sell agreement.
  • You are seeking business financing.
  • You are doing strategic planning.
  • You require a fairness opinion.
  • You need to comply with certain FASB standards.
  • You are converting your C corporation to an S corporation.

What methods do valuators commonly use?

The business is first analyzed and then a valuation method is selected based on the analysis, the interest being valued and the purpose of the valuation. Your financial statements are a starting point when setting a value for your company. But important information will be missed if the analysis relies solely on the financial statements. Valuators select their valuation methods based on their analysis and all other facts and circumstances.

Typically, a valuator considers one primary method to derive the asset’s value, and one or two others to serve as checks or supports of that value. The process of valuing a business is necessarily somewhat subjective. Valuation professionals may vary in their estimates. In using the various methods, even the same valuator may come up with several estimates.

Here are some of the most common valuation methods:

  • Income approach. This approach capitalizes the company’s expected income or cash flow stream by determining the rate of return on investment required by a potential investor, and it sets the value at the amount appropriate to generate that rate of return. This method is often used in conjunction with a discounted cash flow analysis to estimate the present value of the future stream of net cash flows generated by the business.
  • Market approach. This approach gathers data from acquisitions of similar businesses or from the stock prices of comparable publicly traded companies. The valuator adjusts the data to account for differences between the subject company and comparable firms. An adequate number of comparable companies are necessary to produce credible results.
  • Asset-based approach, also called adjusted book value method. This approach requires establishing the value of all assets and liabilities as a method of valuing the entire business. This method is often used when a business’s earnings and cash flow don’t materially contribute to its value. The identification and valuation of intangible assets is the most challenging aspect of this method.

To ensure a quality valuation, be sure to hire an independent valuator who knows the ins and outs of your company and industry.

What makes some businesses worth more than others?

Many factors affect your company’s value. In addition to financial factors (e.g., profitability, revenue sources, cash flow, current debt and equity), some of the key factors affecting value include:

  • Economy: Economic conditions, especially costs of materials and availability of capital, can profoundly affect a company’s continued profitability.
  • Industry: A particular industry’s economic outlook can have an impact on the value of a business. In addition, markets and channels of distribution as well as changes in production technology can greatly affect a company’s future potential and have a major impact on value.
  • Competition: The number and nature of current and potential competitors and their ease of entry into a company’s market can profoundly affect a company’s success.
  • Regulations: From a valuation standpoint, compliance requirements and restrictions to market entry may be particularly important. Also, current or anticipated zoning and licensing restrictions can substantially affect price.
  • Market position: Reputation, pricing policies and diversification of customer base all significantly affect a company’s ability to generate earnings.
  • Intangibles: An established name and reputation, a customer base, a skilled work force and many others are what increase the value of a business above its tangible assets’ fair market value. They can greatly increase a company’s profitability.
  • Internal controls. The functioning of accounting and operational controls affects risk. If internal controls are faulty, financial and other data could be as well.

Jeff Hipshman is a partner at HMWC CPAs & Business Advisors (, one of Orange County’s largest local accounting firms. Contact him at (714) 505-9000 to discuss how your company or client could benefit from HMWC’s business valuation services.