Archive for March, 2011

New Gift Tax Exemption Raises Some Big Questions For Business Owners

Thursday, March 31st, 2011

As part of the tax deal reached by Congress last year, the lifetime gift tax exemption for 2011 and 2012 rose from $1M to $5M for individuals and from $2M to $10M for married couples.

A recent Wall Street Journal article ( has succinctly pointed out that business owners now have a chance to transfer a big chunck of their business to beneficiaries – even before handing over operational control of their business.

A Possible Golden Opportunity

This means that your clients can give away that much wealth without paying a cent in gift taxes.  It can really be a golden opportunity to transfer wealth to the next generation at no tax cost.

However, this transfer of ownership can also bring about complex succession and estate planning issue that business owners should address before giving away a cent.

If you have clients who are business owners and they want to take advantage of this two-year rise to the gift tax exemption, there are questions that they need to ask themselves:

  • Who will eventually lead the business?
  • How can I treat my other heirs fairly?
  • How do I pass down wealth without jeopardizing my own retirement security?

Start Planning NOW

These are complicated questions.  The answers will decide which estate planning strategies make the most sense for your client’s family to use.

In my experience, such decisions typically can’t be made in a matter of weeks or months.  I recommend that your clients who want to take advantage of the new gift tax exemption should start planning now.

The main advantage of your client transferring a stake in his family business now is that his heirs won’t have to take on debt or sell the business to satisfy the estate tax bill incurred upon his death.

Give It Away, But Keep Control

For clients who want to retain control of the business while alive, the transfer can be structured so that they keep managing control for life or for a set period.

To insure the retirement plans remains secure, the transfer can stipulate that the original ower retains a salaried position (employee, consultant or chairman) and has a profit-sharing or defined-benefit pension plan.

I also recommend that business owners earmark assets outside the company for beneficiaires who are not on the company payroll.  That way, the child who eventually takes having to consult with siblings, some of whom may insist upon large descriptions.

As always, I hope this helped you and your clients.  If you have a specific case or concern, please contact our office (909)981-6177.

What Is The Disadvantage of Passing The House To My Children With My Original Income Tax Basis?

Wednesday, March 23rd, 2011

For the sake of illustration, let’s say that you bought your house for $50,000 and lived in it for 30 years without putting any more money into it.  After 30 years, you decide to sell it, and you are paid $350,000 at today’s market prices.  For income tax purposes, the IRS would say that you had a “basis” in the house of $50,000 and a taxable gain on that house of $300,000.  You would have to pay capital gains tax on that $300,000 of “profit.”  At 15%, for example, the tax would be $45,000 – leaving $305,000 for the children.  However, if the house is your primary residence, you may be able to avoid taxation on all gain (up to $250,000, or $500,000 for a married couple.)

Let’s say, however, that you never sell the house, but rather live in it until your death, and then leave it to your children as part of their inheritance.  In that case, the house gets a “step up” in basis to the date of death fair market value.  If the fair market value on the day of your death is $350,000, the “basis” is adjusted to that level.  And if your children sell the house a month later for $350,000 there is no capital gains tax due.  They were able to get the full value of the $350,000 inheritance.  (Please note that beginning 2011, absent legislation, an unlimited “step up” will return.)  Call us now to find out more!  (909)981-6177.

Is it Possible to Establish a Trust For Your Pet?

Thursday, March 17th, 2011

Perhaps nothing better illustrates the importance of pets in peoples lives, and the affection that they feel for them, than the events which followed Hurricane Katrina in 2005, and the failure of the levees in New Orleans.  When rescuers arrived, some people who had been trapped for days by the flood waters refused to leave their homes unless they were allowed to bring their pets with them.

Laws on the subject of pet trusts vary from state to state.  Since animals are not allowed to be beneficiaries of a trust, various legislative devices have been employed in the past.  Some states authorized the creation of “honorary trusts” which could be used to provide for the care of a pet, but were not enforceable by a court.  The Uniform Probate Code recognized “pet trusts” in 1990, and the Uniform Trust Code added a pet trust provision in 2000.  However, the Uniform Codes are only recommendations, and each state chooses whether or not to adopt any of their provisions.  As of the end of 2009, 42 states and the District of Columbia have adopted some type of provision which allows creation of a pet trust, some based on the Uniform Trust Code provisions, and some on neither, including some remaining “honorary trust” provisions.

The law has traditionally regarded pets as “property” and thus not possessing any rights.  In the past, individuals had to do such things as leaving money to a person with instructions to care for their animals, and hope that their wishes would be carried out, since there was no legal way to enforce such a provision.  However, a growing recognition of the importance of companion animals to people has led to several advancements in legislative establishment of means to protect animals left behind.  Call if you have questions!  Our office can help with your pet planning needs (909)981-6177.