Page 50 - MetalForming May 2011

Blackman on Taxes By Irving Blackman
The New Estate Tax Law—Good News, and Bad
Last December, the President signed the 2010 Tax Relief Act, extending for two years the Bush-era income-tax cuts (highest rate for all of 35 percent) retaining the favor- able tax rates (15 percent) for long- term capital gains and qualified divi- dends; and significantly changing estate and gift taxes, among other changes. Here we’ll address the most significant changes related to estate and gift taxes.
The Good News
Bottom line: The new law applies to lifetime gifts and transfers of death for only 2011 and 2012, offering an exemption (pay no taxes) on the first $5 million of your wealth, per person. That’s a delightful $10 million—tax- free—for those that are married. Any excess above the $5 million ($10 million if married) is taxed at a 35-percent flat rate.
Note: Gift and estate taxes are uni- fied into one tax. You can use part or all of the $5 million/$10 million during 2011 and 2012 as a gift; any unused gift amount is tax-free for estate-tax purposes.
The Bad News
The new law includes a sunset pro- vision: After December 31, 2012, the
Irv Blackman, CPA and lawyer, is a retired found- ing partner of Blackman Kallick Bartelstein, LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult? Need a sec- ond opinion? Contact Irv:
Blackman, Kallick, Bartelstein 10 S. Riverside Plaza, Ste. 900 Chicago, IL 60606
tel. 847/674-5295 Blackman@EstateTaxSecrets.com www.taxsecretsofthewealthy.com
old law will be reincarnated, offering only a $1 million exemption ($2 mil- lion if married) and a stratospheric tax rate of 55 percent.
But wait—there actually is some good news here. Let’s talk about the 2- yr. window available to make a $5 mil- lion ($10 million if married) gift. While the window will close on December 31, 2012, what about gifts that you (and your spouse) make during 2011 and 2012? The gifts are good forever—the IRS can’t take ’em back, nor tax you.
Unquestionably, Congress made an unintended mistake. Here’s how. Con-
Completed gifts made in 2011 and 2012 are a made-in-heaven tax opportunity.
sider Joe and Mary (married and afflu- ent), who provide $10 million in gifts of various assets to their kids during 2011 and 2012. That $10 million, plus future income earned by the $10 million worth of assets and any asset appreci- ation, will never be taxed to Joe and Mary, for as long as they live or when they die.
Note: In addition, Joe and Mary each can make annual gifts (including 2011 and 2012) of $13,000 ($26,000 total) to every one of their kids—a continua- tion of the old law.
So, the real question becomes: How can we maximize the tax benefits of this 2-yr. gift-tax window? Completed gifts made in 2011 and 2012 are a made- in-heaven tax opportunity.
Following are examples of how read- ers can enrich their families rather the IRS.
Business Succession
Joe (married to Mary) owns 100 per- cent of Success Co., which is run by Joe’s son, Sam. Joe wants to transfer Success Co., worth $12 million, to Sam.
Here’s the simple plan: First, recap- italize Success Co. to provide Joe with nonvoting stock (say 10,000 shares) and voting stock (say 100 shares)—a tax-free transaction. Then, Joe gifts the nonvoting shares to an intentionally defective trust (IDT), with Sam as the beneficiary.
Note: For tax purposes, Success Co., because of discounts (typically, about 40 percent) allowed by current law, is worth only about $7.2 million—the actual gift tax amount—for tax pur- poses.
A few significant bonuses for Joe:
Not only is Success Co. out of Joe’s estate, but the future substantial income will not be added to his estate. Nor is the company’s future appreci- ated value a continuing problem. Also, the IDT acts as a perfect asset-pro- tection device, protecting Joe and Sam, and keeping the trust assets away from Sam’s wife should he get divorced. Lastly, Joe retains control of Success Co., since he still owns all of the voting stock.
Finally, because Joe intends to con- tinue working for Success Co., he can continue to take a salary and fringe benefits. We can include a wage-con- tinuation plan, as well, so Joe can con- tinue earning a salary to the day he dies.
You Own Investment-Type Assets
...such as real estate (whether income producing or not, but exclud- ing any residence), stocks, bonds, CDs, cash and similar assets. When real estate is involved, we start by putting the real estate in one or more limited liability companies (LLC) as an asset-
48 MetalForming/May 2011
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