2012 Gift Tax Exemptions and Business Planning
As you go about your day-to-day work within your business, you might not be thinking about what will happen when it’s time for you to leave the company. However, recent changes in the gift tax laws have created a window of opportunity that could allow you to transfer more of your business interests for less tax liability than at any other time in history.
This opportunity results from the federal gift tax exemption, which is currently $5 million for an individual (increased from $1 million in 2010) and $10 million for couples (increased from $2 million in 2010). However, it only applies to tax years 2011 and 2012, and could return to the lower exemption levels beginning in 2013. As a result, you have a unique chance to make a monetary gift or interest in your business that could be tax-free now and shielded from future appreciation from taxes.
How could this impact your business? Let’s take a look at these two recent business experiences.
Fred is a father in his 80’s, who owns 100 percent of the stock in a company worth close to $10 million. He’s been reluctant to gift interest in his company, believing that he knows best for his company. With the current gift tax law, Fred will be able to gift close to half of his business to his son, tax-free. However, he knows that the increased exemption could end on December 31, 2012, so he’s beginning to think about the gifting process.
Deconstructing a Partnership
Joe and Sam co-own a construction company. As the Great Recession hit, Joe and Sam saw their business slowly dry up to a trickle. Sam, who is 70, wants to retire and sell his portion of the business. Joe, who just turned 65, has a son working in the business and isn’t ready to stop working. Joe and Sam had a buy-sell agreement for their portion of the business, however, they haven’t updated it in several years. Now, the agreement overvalues the amount that Joe and Same each hold as 50 percent shareholders.
As a result, Joe and Sam have three options to resolve their business dilemma. They can defer their decision to see if their business rebounds; Sam could retain his interest and receive dividends from resulting business – and hire more management; or Joe and Sam could choose to cease the business if work orders don’t return.
Time Marches On
The above scenarios are just two examples of the succession challenges that business owners are wrestling with. While many business owners deferred making decisions for their futures when the Great Recession hit, so are many of them beginning to be more proactive with their businesses. And as the number of business owners approaching retirement age swells, many of them are coming to the realization that they face a retirement landscape that they didn’t anticipate. It’s not perfect – yet time marches on.
As you as a business owner begin to think strategically once again, you’ll find many hard decisions ahead of you. However, these are decisions that must be made, and even though you might rather put them off to a future date, the current more favorable gift tax law means that succession decisions should be made sooner, rather than later.
Along with determining what will happen to your business in the future, you’ll need to consider your retirement needs. Is your current nest egg enough to sustain you in retirement? You may have time to adjust your current company pension plan to help you better prepare for retirement. For example, you might consider a profit-sharing, defined-benefit plan or even staying on at your company as a consultant or salaried employee after the transition. Your financial advisor can assist you in developing ways to meet your retirement as well as your business goals.
Because sorting through your succession and retirement goals takes time, begin by setting aside planning time to begin the process. Then you’ll be able to present your gifts to take advantage of today’s generous gift tax limits.
Contact our Ohio Business Valuations Team
If you’re considering gifting a business interest, contact Rea & Associates. Rea’s business planning professionals will help you ensure that your gift is completed in 2012 so that you’ll be able to take advantage of this year’s higher exception levels. We’ll help you determine that value of the interest that you’re gifting and provide all the gift documentation that you need for tax planning purposes. Contact Rea’s Business Valuations professionals (soon!) to get started on your 2012 gift.