Gift-Related Tax Exemptions: Get 'Em While You Can

Many small-business owners are faced with the the prospect of losing a good chunk of their estates to taxes, rather than going to their heirs. In order to reduce tax liability, it's a good idea to engage in some tax planning that will help you pass on more of your estate -- including the value of your small business.

The good news is that if you are ready to take some serious tax planning steps, now might be just the time to get the job done.

"Tucked into the tax act passed December 17, 2010 was an estate tax exemption of $5 million," Kevin Sanderford told me recently. Sanderford is a financial professional with Colorado West Investments, and he is currently helping small business owners take advantage of a temporary increase in tax exemptions. "The gift tax exemption is the same amount."

"This was kind of a shocker," Sanderford continued. "The Bush tax cuts had the estate tax exemption at $3.5 million. No one expected lawmakers to go beyond that. And the gift tax exemption has never been equal to the estate tax exemption before. But these higher exemptions are only good for 2011 and 2012. In 2013, it all goes back to the way it was."

If small business owners want to take advantage of the higher gift exemption rules, now is the time to do it. With the right planning, it is possible for a business owner to reduce the size of his or her estate now, and reduce its tax liability.

"If you are older, now is the perfect time to do this type of estate planning," Sanderford said. "Say you are worth $6 million. You can give away $5 million of your business now to your heirs, and it will come off your estate tax exemption."

Sanderford said one of the issues many small business owners have with giving away some of the business right now is that some owners fear losing control. "Someone who is worth $5 million to $20 million got there by being in control," he pointed out. "The good news is that there are ways to give away some of your business, and take advantage of the exemptions, without giving up too much control. You can use trusts, or you can give away non-voting shares, for example."

Indeed, Sanderford thinks that the non-voting share option is a good choice for many. "You can get a discount as well," he explained. "If you give away non-voting stock of your non-listed small business, it changes things. The owners can't control the company, and the stock can only be sold to family. So, you could conceivably give away $7 million, but have it valued at $5 million. It's a way to get ahead of the game."

These types of strategies can work for small business owners who want to preserve more of their estate for the family. However, Sanderford was quick to point out that these types of workarounds and tax strategies should not wait until the last minute. "These are complex tax issues. We're talking about a huge gift. You have to get the ball rolling now to make sure everything is structured properly."

Sanderford believes that in 2013, there is a good chance this exemption will be allowed to expire. "There's a good chance those in Washington will be looking around for a way to raise revenue, and letting this exemption retire is one easy way to raise it. If you wait until the second half of 2012 to start having these conversations, it may be too late."