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Not Rich Enough to Need an Estate Plan? Your Company’s Future May Be at Risk

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Asking a business owner to take time for estate planning is seldom met with enthusiasm. Who has time for that?There’s always tomorrow, and besides, are your assets really substantial enough to be called an “estate?” After all, the amount that is protected by the estate tax exemption is now less punitive, thanks to concerted effort by opponents of the dreaded “death tax.” But even a business that is not raking in high profits may have value that isn’t obvious, especially companies that are cash-poor but land-rich. While there is time, you should protect what you’ve built with some solid estate planning.

A Little Background
For years, the estate tax was on a roller coaster as opponents and supporters battled for supremacy. Back in 2001, the estate tax exemption was a mere $1 million. That meant even businesses with modest property, plant and equipment easily exceeded that value, and many were forced to close their doors and sell their assets, just to pay the estate taxes. In 2010 the estate tax was repealed altogether – a remnant from the Bush Administration– but the following year it returned. For 2015 the exemption is much more generous, at $5.43 million and a tax of 40% on the value exceeding the exemption. But there may be more changes on the horizon, good and bad.

There is currently a renewed effort in the Republican-led Congress to permanently repeal this tax. That would mean businesses could continue to function, provide jobs, and contribute to the economy. However, President Obama also has targeted this tax, proposing measures that will raise the estate tax burden significantly on some taxpayers. Forbes magazine predicts that if he succeeds, the U.S. will have the highest effective estate tax in the world (up to 68% with combined federal and state inheritance tax) forcing businesses to close yet barely contributing to overall tax revenue.

What’s in Your Estate?
The IRS defines estate tax as a tax on your right to transfer your own property at your death.Your gross estate may include cash and securities, real estate, insurance, trusts, annuities, business interests and other assets, with certain exemptions.

With advance planning, there is much you can do to preserve your assets by legitimately reducing the tax burden.

  • You can make annual tax-free gifts up to $14,000 to any number of recipients ($28,000 for married couples who agree to split gifts).
  • You can transfer title of some of your assets to your intended heirs now, which removes the assets from the value of your estate.
  • You can establish trusts to own certain assets. This removes them from your taxable estate and shields their value from taxation. Unlike a will, a trust is also private and avoids probate. This is a complex issue which should be done with professional guidance.
  • You can also purchase life insurance sufficient to cover the estate tax after you are gone.But take note: the proceeds of the life insurance policy will also go into your taxable estate and be slashed by estate tax. However, you can avoid this by naming the trust as the owner of the policy.You can then direct the trust to distribute the life insurance proceeds to your heirs, bypassing the estate tax.

Tomorrow isn’t guaranteed for anyone. Smart estate planning with professional guidance is the key to preserving what you’ve labored to build for your family. In recent years some immensely wealthy people – including Sopranos actor, James Gandolfini – died unexpectedly, leaving fortunes that were gobbled up by the IRS, because of missing or misguided estate planning. Don’t be that guy.

Teresa Ambord

Posted In: Legal, Management, Money

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