Utilize your estate tax exemption before year end! How to get started, tips to consider and alternatives

Properly preserving personal wealth is something that most Americans would like to think they are doing well, or they trust that the right people are handling properly. The Estate Tax in the U.S. is extremely high and, if you're not careful, as much as 50% of your wealth can end up going to the state or federal government. So what can you do to prevent that from happening? The answer is gift before January 1, 2013. The Gift Tax Exemption For 2012, the Gift Tax Exemption is $5 million for individuals and $10 million for married couples. With increasing pressures on Congress to reduce the Federal deficit, the Gift Tax is scheduled to decrease to $1 million per person in 2013. There is talk in Congress to increase next year's gift exemption to a higher amount, but it may not be as high as $5 million. The beauty of this once in a lifetime opportunity is that if you give an heir $1 million today, over time that money may grow to $5 million and you won't have to pay taxes on that money because it was gifted, and your heir gets to keep all the money. Taking advantage of this tax break will ensure your hard earned money is in the hands of loved ones rather than in the government's pockets. Having peace of mind that your money is where you want it to be is a valuable asset to your family's well being. Family or closely-owned businesses can take advantage of this as well. Instead of gifting cash, they can gift business stock to family members who are next in line to run the business. They can recapitalize the company by gifting the stock to other family members making them shareholders with non-voting rights. This enables management to maintain control until the appropriate time. Case Study After sitting down with our real estate client company, we learned that the owner's 30 year-old son had expressed interest in someday owning and running the family business. In addition, due to the economic status of the real estate industry, many valuations are at a very low level. If the amount of ownership being gifted represents minority interests, significant discounts can be taken on that value as well. This made our client's decision to "gift" a portion of the company stock to his son an easy one. In order to address the client's needs for this particular situation it was important to set up a gifting program. We made sure to gift $5 million worth of stock to his son and explained that if he added his wife to the gifting program as well, they could gift up to $10 million, preserving more of the company worth. For Mr. Client, that meant he was able to gift 40% of the company stock to his son, tax-free, and retain control of the company. All future appreciation in the value of the gifted stock will never be subject to the Estate Tax. How To Get Started The easiest way to implement a gifting program is to gift the company stock to your children. You will need to get an appraisal to value the gift for gift tax purposes. Additionally, you will need to file a gift tax return. Alternative Methods As an alternative to outright gifts, the gift of a stock can be made to a trust. A trust allows you, as trustee, to maintain control over the trust assets and the access the beneficiary has to the trust. Trusts also protect assets from creditors of all kinds as long as the assets stay in the trust. It is always best practice to consult your financial and legal advisors to keep track of changing gift and trust rules and regulations. They should guide you on how to invest the money so the value of the trust is preserved over time. It is also encouraged to act quickly and take advantage of this unique gifting opportunity before the law changes...again. Barry Sunshine, CPA, is a tax partner at Janover LLC, Garden City, N.Y.