Estate Tax for the Future
When Estate Taxes Take Their Toll
Gordon and Maryann Benson became wealthy the “old-fashioned” way. They worked hard for it. Then, in a sudden traffic accident, they lost their lives, never having an opportunity to enjoy much of what they had accumulated. Their two sons, Jeff and Paul, were devastated. They both worked in key positions at the cable manufacturing company their dad, Gordon, helped build from scratch some thirty years ago. With their dad now gone, their business troubles had just begun.
Before the dust even settled, and as if to add insult to injury, the executor of the Benson estate came to a grim conclusion. The business had to be put up for sale to pay estate taxes! The topic of business succession had come up when the family got together every so often, but Gordon never seemed to find the time from his hectic work schedule to get down to some serious estate planning.Unfortunately, there was none in place when the accident happened.
Potential Safeguards
In the hypothetical example of the Bensons, one of several possible steps Gordon Benson cold have taken would have been to relinquish part of his ownership and to have transferred it to his sons, using certain gifting or sale techniques. Handing over control, and becoming a minor stockholder in the business he had built and run so successfully, may not have been an easy thing to do. But, it might have helped shrink his assets and reduce the crippling tax bite. Additionally, he could have set up appropriate trusts to ensure the net estate passed on without hindrance to hie heirs, as well as to help pay for taxes that came due.
In 2005, the applicable exclusion amount is $1,500,000. Estates exceeding this amount are liable for gift taxes if assets are transferred while the owner is alive (and the gifts exceed the annual gift tax exclusion), and for estate taxes are due within nine months, but six month filing extension is available. The Internal Revenue Service (IRS) allows qualifying farms or closely-held businesses to defer taxes and then pay by installments (with interest) over as long as ten years. However, according to IRS records, very few businesses choose to defer estate tax payments. Family-held businesses need to take estate-planning steps to avoid a likely drain on valuable assets and the possibility of closely held ownership coming to an abrupt end.
Teamwork
An attorney and accountant can help your estate planning team devise an effective strategy to move assets out of your taxable estate. This is an ongoing process that might involve the setting up and administration of trusts and other instruments. While there are obvious costs involved in implementing an estate plan, there is no doubt that it is well worth the effort.
One effective tool estate planners often use to help fund estate tax payments is the Irrevocable Life Insurance Trust (ILIT). The ILIT purchases a life insurance policy on your life (the donor). The policy premiums are funded by annual gifts you make to ILIT. You could use your annual gift tax exclusion to fund the ILIT. (Note: The annual gift tax exclusion is adjusted each year for inflation.) In more advanced uses, ILIT can be strategically employed to help ensure continuity in closely-help business.
You’ve worked hard to build your business and will want to avoid finding yourself in the situation the Bensons faced, although actual financial planning experiences will vary. Since the future operations and/or growth of a family-owned business could be severely affected by its estate obligations, it is important to set up and implement an estate plan before it’s too late.
Gordon and Maryann Benson became wealthy the “old-fashioned” way. They worked hard for it. Then, in a sudden traffic accident, they lost their lives, never having an opportunity to enjoy much of what they had accumulated. Their two sons, Jeff and Paul, were devastated. They both worked in key positions at the cable manufacturing company their dad, Gordon, helped build from scratch some thirty years ago. With their dad now gone, their business troubles had just begun.
Before the dust even settled, and as if to add insult to injury, the executor of the Benson estate came to a grim conclusion. The business had to be put up for sale to pay estate taxes! The topic of business succession had come up when the family got together every so often, but Gordon never seemed to find the time from his hectic work schedule to get down to some serious estate planning.Unfortunately, there was none in place when the accident happened.
Potential Safeguards
In the hypothetical example of the Bensons, one of several possible steps Gordon Benson cold have taken would have been to relinquish part of his ownership and to have transferred it to his sons, using certain gifting or sale techniques. Handing over control, and becoming a minor stockholder in the business he had built and run so successfully, may not have been an easy thing to do. But, it might have helped shrink his assets and reduce the crippling tax bite. Additionally, he could have set up appropriate trusts to ensure the net estate passed on without hindrance to hie heirs, as well as to help pay for taxes that came due.
In 2005, the applicable exclusion amount is $1,500,000. Estates exceeding this amount are liable for gift taxes if assets are transferred while the owner is alive (and the gifts exceed the annual gift tax exclusion), and for estate taxes are due within nine months, but six month filing extension is available. The Internal Revenue Service (IRS) allows qualifying farms or closely-held businesses to defer taxes and then pay by installments (with interest) over as long as ten years. However, according to IRS records, very few businesses choose to defer estate tax payments. Family-held businesses need to take estate-planning steps to avoid a likely drain on valuable assets and the possibility of closely held ownership coming to an abrupt end.
Teamwork
An attorney and accountant can help your estate planning team devise an effective strategy to move assets out of your taxable estate. This is an ongoing process that might involve the setting up and administration of trusts and other instruments. While there are obvious costs involved in implementing an estate plan, there is no doubt that it is well worth the effort.
One effective tool estate planners often use to help fund estate tax payments is the Irrevocable Life Insurance Trust (ILIT). The ILIT purchases a life insurance policy on your life (the donor). The policy premiums are funded by annual gifts you make to ILIT. You could use your annual gift tax exclusion to fund the ILIT. (Note: The annual gift tax exclusion is adjusted each year for inflation.) In more advanced uses, ILIT can be strategically employed to help ensure continuity in closely-help business.
You’ve worked hard to build your business and will want to avoid finding yourself in the situation the Bensons faced, although actual financial planning experiences will vary. Since the future operations and/or growth of a family-owned business could be severely affected by its estate obligations, it is important to set up and implement an estate plan before it’s too late.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!