New Law Opens New Opportunities for Successful Family-Business OwnersApril 1, 2013
Joe and Mary, both in their early sixties, consider themselves blessed. Joe started his business in 1975. The first dozen years were a struggle, but then revenue and profits began to blossom—more customers and more employees. Now, two key employees are his only kids, Sam and Sid. After college Joe insisted the boys work elsewhere for three years. They did, and now they run the business (Success Co.), with some coaching and help from Joe.
Let’s take a look at Joe’s current wealth. This year’s annual personal financial statement prepared for the bank by Joe’s CPA (Cal) shows a net worth of $18.5 million. Included are two homes, a primary residence in Michigan and a winter home in Florida; the land and building leased to Success Co.; Joe’s 401(k) ($1.1 million); and a stock and bond portfolio ($1.6 million). The prime asset, of course, is Success Co., which Cal values at $11.7 million.
How did Joe feel about taxes? Income taxes are okay, “the price of doing business in America,” he says. But estate taxes, he says, are “a double tax on success.”
Let’s talk about Joe’s estate taxes. When the president signed the new tax law on January 2, 2013, to avoid the fiscal cliff, he initiated two significant changes affecting estate taxes: he lowered the top estate-tax rate from 55 percent to 40 percent, starting in 2013; and he continued forever the $5 million (tied to inflation) that is free of the gift or estate tax, starting on January 1, 2013. Because of inflation, the free amount rose to $5.125 million in 2012 and is now $5.25 million for 2013. And if you are married, that figure doubles to $10.5 million for 2013.
As soon as Joe heard the estate-tax news he called a meeting with Cal and his attorney Lenny, who specializes in estate planning. Joe had questions. First, he asked: “What would my estate tax be on my current net worth?” Everyone had a copy of Joe’s latest personal financial statement. “In the $3.2 million range,” answered Lenny.
“But my wealth grows almost every year, particularly the value of Success Co.,” said Joe “What happens to the estate-tax cost as my wealth rises?”
“Well,” responded Lenny, “for every $1 million in increased wealth, your estate-tax bill climbs $400,000.”
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