What Will Happen to Your Business When You Die?

Scott Goldberger, Estate and Trust Director at Kaufman Rossin and John R. Anzivino, Estate & Trust Principal at Kaufman Rossin, contributed this article to BusinessNewsDaily’s Expert Voices: Op-Ed & Insights.

Do you have a succession plan for your business? Most business owners would like their families to benefit from their business and wealth, but they may also have other concerns, such as maintaining their lifestyle, keeping control of the company, minimizing gift or estate taxes and safeguarding against financial predators.

Now is an opportune time to start or update your plan because some of the most powerful estate planning techniques are likely to be reduced or eliminated in the near future. Earlier this year, the Obama Administration released its Fiscal Year 2014 Revenue Proposals, highlighting certain tax law changes that are under consideration – including several in the estate, gift and generation-skipping transfer tax arenas.

Back in 2009
Under current law, the maximum tax rate for estate, gift and GST tax purposes is 40 percent and, for each of those taxes, the exclusion is $5 million (indexed for inflation to $5.25 million in 2013). Under the Proposal, beginning in 2018, we would revert back to 2009 law, when the top rate was 45 percent and the exclusion amount was $3.5 million for estate and GST tax, but only $1 million for gift tax. Also, there would be no indexing for inflation.

GST tax exclusion is not forever
The GST tax is a 40 percent tax imposed on gifts and bequests to transferees two or more generations younger than the transferor (e.g., a gift to your grandchildren). As noted above, the GST tax exclusion is $5.25 million in 2013. If the GST tax exclusion is allocated to a trust, no GST tax is imposed on the trust assets or on distributions to the beneficiaries. Moreover, as long as the assets remain in trust, they are not subject to estate tax when the beneficiaries die.

Historically, state laws restricted the number of years that a trust could last. Today, many states permit trusts to continue in perpetuity or for an extended term, such as 500 years or 1000 years. If the GST tax exclusion is allocated to these so-called “dynasty trusts,” the trust assets may compound over several generations free of transfer tax.

In an attempt to curb this practice, the Proposal specifies that on the 90th anniversary of the trust’s creation, the allocation of the GST tax exclusion would terminate. The rule would apply only to trusts created after the enactment of the new law and to post-enactment contributions to a preexisting trust.

Grantor trusts
With a “grantor trust,” the grantor (i.e., creator) is treated as the owner and reports the trust’s income and deductions on his personal income tax return. Transactions between the trust and grantor are ignored. If the trust is irrevocable, transfers to it generally are not included in the grantor’s estate upon his death.

Grantor trusts are often used to shift wealth from the grantor to the trust’s beneficiaries without the imposition of gift or estate tax. For example, a business owner (the grantor) could sell an interest in his business to a grantor trust in exchange for a promissory note. He does not recognize any gain (or loss) on the sale and does not pay income taxes on the note interest. Any income or appreciation on the trust assets after the sale inures to the benefit of the trust outside of the business owner’s estate. Moreover, when he pays income tax on the trust’s earnings, it functions like an additional tax-free gift to the trust.

The Proposal seeks to reduce the benefits of this technique by requiring the post-sale income and appreciation to be included in the grantor’s estate upon his death. The income and appreciation is treated as a gift if, during the grantor’s lifetime, it is distributed to the beneficiaries or grantor trust status ceases. This rule would not apply to sales consummated prior to the enactment of the new law.

Continue reading this succession plan article at Business News Daily.com.


John Anzivino, CPA, FICPA, AICPA, is a Estate & Trust Principal Emeritus at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

Scott Goldberger, JD, is a Estate & Trust Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.