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Estate tax planning needs attention now, experts advise

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Estate tax planning pressures will continue to rise for small business owners as 2012 draws to a close.

That’s the outlook put forth by several professionals in the field.

“The tax rates are almost guaranteed to go up,” said William Goodman, CPA and owner of Goodman & Co. Certified Public Accountants in Easton.

For business clients with questions about how to transfer their business to their heirs, Goodman had previously been telling them to wait until after the General Election results.

“Now I have a better idea of how to plan,” said Goodman.

With President Obama returning to the White House for a second term, any political decisions Congress makes will have a direct impact on small business owners since estate tax rules are fixed only through 2012.

After 2012, the rules are set to return to pre-Bush era rules. So, instead of the $5 million gift tax and estate tax exemption that applies for 2011 ($5.12 million in 2012), the exemption will be $1 million, according to Casey Hoch, a CPA with Hoch Accounting in Nazareth.

“By all accounts, it seems it’s going to be quite a fight on Capitol Hill,” said Judith Harris, an attorney and chairwoman of the Estate Trust and Tax Group office of Norris McLaughlin & Marcus, P.A. of Allentown.

“I’m still advising my clients that we will still have this tax exemption next year.”

The uncertainty surrounding the federal estate and gift tax exemption has business owners in a state of flux.

“President Obama has promised to raise tax rates; some of the most onerous ones are the estate tax,” said Goodman. “Anyone who has a small business is worried.”

The biggest challenge in estate planning is that business owners are planning for a moving target, said Hoch. Generally, people operate based on what they think will happen and, if the outlook is poor, they’ll respond accordingly.

“People assume Armageddon and act that way until they see things differently,” said Hoch.

Business owners need to know how much of their income is going to go to taxes and – without any direction or rules in place – people think the worst, which could lead to more small businesses firing more employees, Hoch added.

“It’s a tough situation exacerbated by the fact that no one knows what’s going on,” he said.

While it is very complicated for a business owner to sell a business before Dec. 31, the best option for these business owners is to take advantage of tax rates as they are now, said Goodman.

Business owners can also sell the business now, pay the taxes on it, and then buy it back.

Business owners exploring estate planning want to figure out how to get business transferred to a family member or heir at the lowest tax bracket, said Goodman.

Small businesses also need to focus on their core business and what makes them money, said Hoch.

A lot of business owners are gifting up to the maximum amount of $10,240,000 per couple in order to get the gift out of their estate now, said Anthony Rachuba IV, an attorney who specializes in estate and tax planning at Fitzpatrick Lentz & Bubba in Center Valley.

“Now’s the time to do it; people are fearful that that’s going away,” said Rachuba. “They won’t be able to make those large gifts.”

Business owners can also put assets and life insurance in a trust for family or future generations, said Rachuba.

Rachuba is hopeful that Congress will grant some type of extension for this year to give people more time to develop their estate plans.

“The only certainty is there’s a possibility it can go away this year... (all the way) back to $1 million,” said Rachuba.

Another challenge comes in the form of the U.S. capital gains tax and dividends income tax. Both are currently generally at 15 percent tax rates, but President Obama has often announced that he wants to raise them, said Goodman.

The maximum income tax rates on other income are now 35 percent and there’s a proposal to raise the rate to 39.6 percent.

“These rates are low to provide an incentive for businesses to distribute corporate profits,” said Goodman. “They provide an incentive for more capital investment in businesses, business expansion, and jobs.”

In addition, they are at the same tax rate to avoid confusion and litigation whether corporate income is distributed as a dividend or upon the sale of stock creating capital gains, said Goodman. This is more of a problem for closely held, smaller, and family businesses.

The dividends and capital gains taxes are on top of corporate income taxes, which range from 15 percent to 38 percent, said Goodman.

“Personally, I believe corporate income taxes should be zero or dividends and capital gains should be at zero tax rates,” said Goodman. “We have double taxation, which seems unfair. It discourages business and job growth.”

For about six years, the federal estate tax and federal gift tax exemptions were decoupled, meaning that they were no longer of equal amount, said Harris.

From 2004 to 2009, the federal estate tax exemption increased gradually, while the federal gift tax exemption remained at $1 million, she said. In 2009, for example, the gift tax exemption was $1 million per person but the estate tax exemption was $3.5 million.

One could give away no more than $1 million of assets during his or her life without paying a gift tax, but one could leave up to $3.5 million to others at his or her death and not incur estate tax.

“This reduced gift tax exemption limited the tax planning opportunities one had,” said Harris. The federal estate tax went away for a year in 2010. The tax returned, as scheduled in 2011 but thanks to 11th-hour legislation by Congress, it returned with a happy surprise for business owners and other taxpayers, said Harris.

Each of us had an unprecedented $5 million exemption which could be used either during our life in making gifts or alternatively, by our estate at our death, said Harris.

This increase exemption amount – and the re-coupling of the estate and gifts taxes – has presented excellent opportunities in 2011 and 2012 to make the most of transfers of business and other assets to the next generations, said Harris.

In 2012, the exemption went up $120,000, making the estate and gift tax exemption $5.12 million per person, Harris added.

Brian Pedersen

Brian Pedersen

Reporter Brian Pedersen covers construction, development, warehousing and real estate and keeps you up to date on the changing landscape of our community. He can be reached at brianp@lvb.com or 610-807-9619, ext. 108. Follow him on Twitter @BrianLehigh and read his blog, “Can You Dig It,” at http://www.lvb.com/section/can-you-dig-it.

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