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Business Valuation LLC Phone: 304 692 1385 Fax :304 599 7250 Email: bizvaluer@valuellc.com |
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Active and Passive Appreciation
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Business Valuation in Estate and Gift tax Planning Could anything be farther from your clients' mind than gift and estate tax planning in the middle of all the chaos in the financial markets? Have you thought about any of the following techniques? And is it not true that the process of repealing the dreaded estate tax has started. Think again. The new tax package does include a reduction of the estate tax, but the repeal does not kick-in until the year 2010. In the meantime, the estate tax exemption increases from $675,000 in 2001 to $1 million in 2002 and 2003, $1,5 million in 2004 and 2005, $2 million for 2006 through 2008 and $3.5 million in 2009. When the year 2010 rolls around, the estate tax is gone. Too bad this is not the end of the story. Even though the estate tax is being phased out, the gift tax is set to stay on the books. Congress was concerned that without a gift tax, wealthy taxpayers would make large gifts to family members in lower-income tax brackets. To prevent this, even after the repeal of the estate tax, the law retains the gift tax with a $1 million lifetime exemption. If you are in your 50s or 60s, have generated a modest amount of wealth approaching half a million or more, chances are you will live to see a reversion of the exemption limits to the current level of $1 million or a modestly higher amount. Most likely, your estate will have grown and suffer a hefty, tax bite. Of course if you are "lucky" enough to die in 2010, then perhaps your heirs will side-step the estate tax. However, the repeal is temporary. That is, if you make it to 2011, the entire estate tax schedule comes back with just a $1 million exemption. Careful estate planning is so difficult to think about, and the promised repeal is so seductive, but it is the right thing to do, and the current time is the best time to do it. The current combination of low asset values and the increasing exemptions during the next 10 years have created excellent opportunities. Here is an illustration. Assume that, in the summer of 2000, a mere 15 months ago, a married couple had $5 million invested in the S&P 500 index. If these assets were used to make taxable gifts to their children, they would have paid taxes of over $2.0 million. (Assuming a top g ift tax rate of 55 percent and a joint unified credit of $1.3 million). Today, that same basket of stocks that was worth $5 million last summer is worth about $3.25 million. Is there a silver lining in the dark cloud of asset deflation? Absolutely. If the same couple gifts those same assets today, under the same assumptions used above, they would pay almost $1 million less in gift taxes. Add on the increasing exemptions and reducing rates and the gains start adding up quickly. Business Valuation LLC can help to develop valuation models and illustrate the impact of different planning strategies on the estate plans you develop for your clients. contact us.
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