Page 70 - MetalForming April 2013

Blackman on Taxes
By Irving Blackman
New Law Opens New Opportunities
for Successful Family-Business Owners
Joe and Mary, both in their early sixties, consider them- selves blessed. Joe started his business in 1975. The first dozen years were a struggle, but then revenue and prof- its 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.
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.”
The Problem
After a bit of give-and-take discussion, all agreed on Joe’s problem:
Joe’s wealth already places him in the highest estate-tax bracket—40 percent. Since the value of Success Co. contin- ues to grow, it should be removed from his estate (by a trans- fer to Sam and Sid) as soon as possible. Joe must retain con- trol of Success Co. for as long as he lives, and Joe and Mary must have a flow of income to maintain their lifestyle when Joe retires in three years.
A long discussion followed concerning the fate of Success Co. Should Joe sell the company to Sam and Sid, give it to them, or have the company redeem Joe’s stock. Try as they would, they could not agree on a viable solution. That’s when Joe called me.
The Solution
Many family-business owners have been down the same frustrating path as Joe. A sale kicks up current capital-gains tax. A gift means no more income to Joe and Mary. Variations suffer one or both disadvantages. And inflation, for either a sale or gift, remains an unknown fear factor for Joe when he retires.
What to do? Enter a concept called Spousal Access Trusts (SATs), an irrevocable solution to every issue raised by Joe’s problem.
The first step in creating SATs for Joe and Mary is to divide the Success Co. stock so that Joe and Mary each own 50 percent of the nonvoting stock. Note: If you do not have voting/nonvoting stock, you can create them using a simple tax-free transaction. Typically, Joe will keep the voting stock (say 100 shares) and control of Success Co., and the nonvot- ing stock (say 10,000 shares) is gifted to the SATs—5000 shares transfers to Mary’s trust and 5000 shares transfers to Joe’s trust.
Now Joe and Mary can each use all or a portion of their $5.25 million gift-tax free exemption when gifting the non- voting stock to the trusts. An important tax note: nonvoting
Let’s take a look at Joe’s current wealth. This year’s annu- al 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.
The first step in creating SATs for Joe and Mary is to divide the Success Co. stock so that Joe and Mary each own 50 percent of the nonvoting stock.
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 mil- lion 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 meet- ing with Cal and his attorney Lenny, who specializes in
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein, LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult? Need a second opinion? Contact Irv:
tel. 847/674-5295
Bir v@ir vblackman.com www.taxsecretsofthewealthy.com
68 MetalForming/April 2013
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