Bring in the Next Generationby Michelle Bomberger | December 13, 2011
Our guest blog post today comes from Kris Gray, Founder and Director of Business Financial Planning, and Jodi Giles, Director of Legacy Planning, at Integrity Financial Corporation. They share why the current lifetime gifting limits make now an ideal time to transfer ownership to the next generation in a company.
Small and medium sized family businesses that are on a steady path of profitability should consider the new lifetime gift exemption levels as an ideal window for transferring shares to the next generation.
As part of the tax deal passed by Congress late last year, the lifetime gift-tax exemption jumped to $5 million from $1 million for individuals and to $10 million from $2 million for married couples in 2011 and 2012. This historic increase means that people can now give away significantly more than they could in 2010 without paying a penny in taxes.
The main benefit for those who make a gift now, is a transfer of shares at a much lower valuation than they will likely be at the time of death thereby shielding future appreciation from taxes. These are unprecedented numbers with huge tax savings potential. The catch? For now, the increased lifetime gift tax exemption amount is in force for 2011 and 2012, but it is anyone’s guess what will happen after 2012.
To think, just a year ago the lifetime gift tax exemption amount was only $1 million (a different figure than the estate tax upon death). Business owners now have the chance to pass a substantially larger stake in their businesses to the next generation during their lifetime while simultaneously coaching them on important business decisions.
There are a number of ways to incorporate this potentially temporary gift tax exemption amount into a comprehensive estate plan. That said, transferring ownership could raise complicated succession and estate-planning issues that families need to address. Such issues often involve thoughtful conversations during the planning process. Given we are already halfway through this two-year window of opportunity, it makes sense for those wanting to take advantage of the new gift-tax ceiling to start planning now.