Estate tax rates are among the many unknowns with regard to tax policy in the coming years. Heres where we stand: Currently the estate tax rate is 35% with a lifetime estate tax exemption of $5.12 million. If nothing happens legislatively in 2013 the estate tax will increase to a 55% top rate and an exemption of $1 million — and many family-owned construction firms could be hit hard.
But its anyones guess with regard to whether or not that increase will happen. The estate tax increase is one component of the tax-mageddon that hits in 2013 when Bush tax cuts expire and health care reform taxes kick in. It is unlikely that Congress and the Administration would allow a half-trillion dollars worth of tax increases to take place without some mitigation (would they?) and the estate tax increase might (or might not) be one of things mitigated.
How to deal with this ambiguity? Elaine Ervin Partner with AGC-member Moss Adams suggests that it is prudent for contractors to hope for the best and plan for the worst which means now is the time to make estate planning a priority. She offers some practical advice below.
Meanwhile AGC of America has been telling Congress that while permanent full repeal of this tax is the best option to ensure construction businesses are able to stay in business after the death of an owner reasonable permanent reform also provides the necessary continuity that AGC contractors demand and deserve.
But rather than spending time and money on business growth job creation and equipment purchases contractors are forced to assume that the burdensome estate tax will be back to a 55% top rate in 2013 said AGC of Americas chief lobbyist Jeff Shoaf. This means resources are still being directed at finding ways to pay this tax as well as planning for the liquidation of assets at the time of death in order to pay up to 55% in taxes.
Understanding this election-year political environment makes agreement on any tax package impossible AGC is asking Congress to extend ALL expired and expiring tax cuts for one year and to address comprehensive tax reform after the election. In short if ever there was a time for Congress to kick the can down the road this is it.
But back to planning for the worst:
The next few months provide contractors with the opportunity to keep more of their hard-earned wealth and give less to the IRS says Moss Adams Ervin. And construction company owners need to ensure estate plans are closely aligned with business succession plans.
Ervin offers these questions to consider:
• If you already have a will or estate plan does it fit your current financial and personal situation?
• Does your estate plan leverage current tax rates effectively? The planning you do now could result in significant tax savings for your heirs. For example through 2012 you can gift up to $5.12 million with no current cash outlay for taxes. Any amount over that level will be taxed at 35%. In 2013 that ceiling drops to $1 million and tax on amounts over that low threshold will instead be assessed at a 55% rate. For a $5 million gift that means you’d pay nothing in out-of-pocket tax costs in 2012 compared with a hefty $2.2 million on the same amount in 2013. In addition income tax rates on ordinary income and capital gains are also scheduled to increase dramatically in 2013 making it all the more important to begin exploring strategies sooner rather than later.
• Do you live in a state that doesn’t currently assess gift taxes? Oregon Washington and many other states don’t but they do assess a significant death tax. Thus if you make lifetime gifts you could pay no state transfer tax on them since gifts aren’t “added back” in the computation of state death taxes.
• Have you charted the flow of assets to your beneficiaries? The distribution of some assets is determined by asset title or beneficiary designation rather than a will. For example a bank account created as a Joint Tenant with Right of Survivorship passes to the surviving joint account holder regardless of what your will says. A retirement account or life insurance passes to the beneficiary you designate. However what can happen is one of your beneficiaries may receive a larger (or smaller) inheritance than you intended. So it’s important to check how assets will flow to ensure they’re distributed as you intend.
Ervin notes that some people may want to take advantage of the current gift tax exemption to give away greater amounts of their assets. Should you risk waiting until 2013 to see whether Congress renews the current gift tax rates and exemptions? You could Ervin says. But for most the potential tax savings now are simply too significant to ignore and gifting assets to your children this year might make more tax sense than waiting.
Plus Ervin urges construction firm owners to ensure their estate plans are aligned with business succession plans. If the company is to continue without you a well-coordinated plan can provide for a smooth transition for employees and minimize potential work disruptions she says.
Contractors work hard to get where they are and preserving what they’ve earned—to finance retirement to benefit heirs or to leave a wealth legacy—is a worthy goal Ervin says. Their ability to keep more of what they’ve earned relies on understanding the estate and gift tax setting and coming up with a plan to navigate it effectively.
Even if it means traversing the muddled tax landscape of 2012.