Want to protect your estate from Uncle Sam? There are few important changes you should pay attention to based on new legislation that passed in December for the 2011 tax year.
To help with the heavy lifting is Danielle Mayoras, 39, co-author, with her husband, Andy Mayoras, of the book Trial & Heirs: Famous Fortune Fights! The book details the estate planning missteps of celebrities like Michael Jackson, Princes Di, Heath Ledger, Marlon Brando, and Gary Coleman. When the couple isn’t working as partners in the law firm Barron, Rosenberg, Mayoras & Mayoras, they are busy flying around the country teaching and training Americans the essentials of estate planning.
It’s especially important to think about when you own your own business.
Because creating a business succession plan isn’t just important in case of an untimely death, but in case of a car accident or some other medical misfortune that could leave a business owner unable to work.
So, how can business owners protect themselves and their families to make the most of what they have? What do you need to know about the new legislation?
Here’s the good news: Congress passed a reprieve on Dec. 17, 2010, which allows for a $5 million federal exemption per individual, instead of the $1 million exemption that was originally planned, or a $10 million federal exemption for a couple. The bad news: this exemption is set to expire in 2013, unless Congress enacts new legislation, which means you have two years to take advantage because as of right now, in 2013 the laws revert back to a $1 million exemption for an individual.
Important Background Information
In 2010 there weren’t any federal estate tax laws, Mayoras says, which means capital gains taxes included a $1.3 million exemption for those filing individually, and an additional $3 million exemption for couples filing jointly. “Many people forget that we had a capital gains tax, even thought we didn’t have a federal estate tax last year,” says Mayoras.
To Get the Additional Federal Exemption Money in 2011 You Must ….
That $10 million exemption isn’t automatic. “Many people still don’t realize that you have to jump through a couple of hoops,” says Mayoras, who specializes in estate and special needs planning and elder law. To be eligible for the money, individuals or couples must file an estate tax return. Married couples can collectively give away $10 million, individuals $5 million. There’s also a new provision to roll over $5 million from a deceased spouse.
Plan Ahead for Potential Family Conflict
Go to a professional and discuss the family situation. Potentially there could be problems in a second marriage situation. If the husband (or wife) passes away, and the children from the first marriage are the executor of the estate, they may refuse to file an estate tax return for the remaining spouse so he or she can receive the full $10 million exemption.
To prevent that from happening, talk to an attorney, financial adviser and/or a CPA. Estate attorneys can put a certain provision into the trust that requires the executor or trustee to file that estate tax return.
Remember there is an unlimited deduction to pay for medical bills or tuition, but that money must be paid directly to the institution, such as a hospital or university. This means a grandparent can pay for their grandchild to go to college and not have it be considered part of their $5 million exemption, as long as that money is paid directly to the institution and not the individual. This can help decrease the value of an estate.
Know Your State
Just because the federal law has changed, 21 states have their own inheritance tax laws. This article in Forbes gives a nice breakdown on state specifics.
Build in a Buy-Sell Agreement
Make sure there is some provision in your business for whoever takes over, stating that the beneficiary from your estate will receive the proper value. Plan ahead to decide who is going to be taking over and how beneficiaries are going to receive the value of the business.
Plan for the Unexpected
Most people only plan their estate in the event that they die. But what if you become disabled? It’s an important question that Mayoras says not enough people think about until it is too late. Who will run your business and your estate? “If you don’t have proper documents in place, it goes through the court system and can you imagine the courts trying to run a business?” Mayoras asks. Make sure there is a power of attorney and that you have a patient advocate.
Dawn Reiss is a Chicago-based journalist who teaches magazine reporting at DePaul University and writes for 25+ national and regional outlets annually.