How the New Tax Law Affects Your Estate Planning

In my last post, I wrote about how the tax legislation passed in March and December of 2010 extends capital gains and income tax cuts for two more years, and I suggested that business owners consider timing the sale of their businesses to take advantage of these lower taxes.

What you may not be aware of is that there are further tax ramifications to the Obama Tax Relief Act that was signed into law in December. That act included significant changes to estate and gift tax rates that you need to be aware of if you intend to transfer your estate to your heirs, either before or after your death.

Without knowing your specific situation, I can’t presume to offer more than general observations here. I would strongly recommend to any business owner that you review your estate plan in detail with an experienced professional adviser to see whether adjustments need to be made in light of the new laws.

To summarize this legislation briefly, the recent changes to estate and gift taxes mean that from now until the end of 2012, you can give more to your heirs without penalty.  Before the recent laws passed, the estate and gift tax rate was set to rise at the end of 2010 from 35% to 55%.  Now, that rate hike has been deferred for two years and will stay at the lower rate of 35% until 2013.

Another change is that the taxable gift exemption has been raised from $1 Million to $5 Million per person. This means that you can give up to $5M without the gift being taxed.  For business owners, this means that if you have been planning to transfer proceeds from the sale of your business to family members, you can give up to $5M tax-free for the next two years. A married couple can give up to $10M tax-free.

What do these tax breaks mean for you as a business owner? The reduced tax rate gives you the opportunity to transfer more of your estate to your heirs during your lifetime without paying gift tax.  If you are planning to sell your business, then timing the sale to take advantage of this two-year window is something you should consider.  Selling your business while estate and gift tax rates are low could significantly increase the net amount you are able to give to your heirs.