Press Room: Tax Release

August 02, 2012

Succession Planning for Entrepreneurs…Why 2013 May Be Too Late

Entrepreneurs consistently face the difficulty of passing the family business to younger generations. Among the many challenges to successful transitions is the cost of estate, gift and generation-skipping taxes (GST) payable on transfers to family members. As challenging as today’s transfer tax environment is, scheduled changes in legislation will make inter-generational transfers even more difficult.

Given these impending legislative changes, 2012 presents a potential limited window for individuals to accomplish significant succession planning. Because this planning requires time to consider and implement, it is critical that you begin the process now and consummate the plan before year-end. The reasons for this opportunity include:

  • The individual gift, estate and GST exemptions are $5.12 million ($10.24 million in aggregate for a married couple), and are scheduled to decrease to $1 million on January 1, 2013. (The GST exemption will be somewhat higher due to inflation indexing.)
  • The top gift, estate and GST tax rate is 35%, scheduled to increase to 55% on January 1, 2013.
  • The August 2012 AFRs (interest rates applicable to inter-family loans and sales) are at historic lows: 0.25% short term; 0.88% midterm; and 2.23% long term.
  • Valuations, upon which wealth transfer planning are based, are below their peak levels. For example, business valuations, while somewhat recovered from 2008-2009 levels, are still considered by many to be relatively low. Similarly, real estate valuations for virtually all commercial property types remain below 2007 peaks. Volatility, risk and uncertainty continue to increase minority interest discounts for lack of control and lack of marketability. As an aside, using high quality appraisers continues to be important in valuing property to be transferred. For example, the Tax Court recently recognized the stature of MAIs (Members of the Appraisal Institute) for real estate valuation. 
  • Valuation discounts for closely-held businesses and other entities, which have been the subject of numerous legislative proposals that would limit their availability, can still be used to leverage transfers under the current exemptions.

For anyone who has used $1 million of their lifetime gift tax exemption, the overall effect is that gifts or other transfers made in 2012 in the incremental amount of $4.12 million ($8.24 million for married couples) can be made completely tax free; whereas, the same transfer made in 2013 will incur an immediate tax of $2.111 million ($4.222 million for married couples). Using additional planning techniques can dramatically increase these savings by removing additional amounts from the estate tax system.

Potential Cost of Using Incremental Exemption Amount in
2012 vs. Same Gift in 2013*


*Assumes $1 million gift exemption(s) previously used.

Predicting the course of future tax legislation is impossible, but the unfavorable law changes in 2013 noted above will occur automatically unless Congress acts. Regardless of potential legislative developments, it is unlikely that the tax laws and economic factors noted above will be more favorable in the foreseeable future than what they are today.

The balance of 2012 offers a unique opportunity to substantially reduce the estate tax cost of transferring closely-held businesses and other assets. Because wealth transfer impacts family dynamics and other aspects of your succession arrangements, it will require time to thoughtfully plan for this 2012 opportunity. Therefore, we urge you to consult with your tax advisors as soon as possible.