Updated: Wed, 11/14/2012 - 01:08

Valuations in estate and gift-tax planning

special photo Askew Paul Harms
special photo Askew Paul Harms
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Valuations in estate and gift tax planning

Taxpayers have been undecided about what to do regarding their estate and gift plans due primarily to the uncertainty about 2013 tax laws. For certain people, particularly high net worth individuals who are looking at estate planning and asset transfer issues, putting this decision off much longer could prove to be costly.

Current law allows for a $5.12 million lifetime estate and gift tax exemption and a 35 percent maximum tax bracket, both of which are set to expire at the end of 2012. Unless Congress acts soon, the exemption will revert to $1 million and the maximum tax bracket will increase to 55 percent on Jan. 1.

So we are left with a small window of opportunity that many high-net-worth individuals should not ignore.

Valuations of privately held businesses and partnerships go hand in hand with maximizing the current $5.12 million lifetime gift exclusion. With asset values relatively low due to the economic downturn, a greater portion of a business can be transferred and remain under the $5.12 million exclusion amount.

In addition to current low asset values, two key discounts central to valuation for estate and gift tax purposes continue to be lack of control and lack of marketability. Each tends to be quantifiable with favorable outcomes for both typically based on gifting a minority interest in a business.

The minority interests are most commonly created using partnerships, limited liability companies (LLCs), family limited partnerships (FLPs) and other similar entities.

Although the deadline of Dec. 31 for making qualifying gifts under the $5.12 million exclusion is quickly approaching, there is still time to employ a gifting strategy that could save money for you. Again, keep in mind that values can be gifted this year tax free where doing such next year could result in gift taxes and or higher amounts due under estate tax rules.

While all gifts must be made during 2012, the valuation report that must be submitted with the gift tax return need only be completed in time to file the return. The typical valuation of a business or family limited partnership requires a period of several weeks to a month or more to perform the analysis in determining fair market values.

Taxpayers who own multiple assets may need advice as to which ones would be the best to gift.

The most frequently asked question from taxpayers contemplating such a large gift this year is: “If Congress reduces the gift exclusion, what happens to gifts in excess of the new exclusion amount?” At the time of death, all gifts (beyond those covered by the annual exclusion) are added to the value of the estate. The estate is allowed only the exemption in effect at that time.

However, all the appreciation from any gifts made during the life of the decedent is exempt from estate tax. The ability to make a large gift this year, particularly of an asset that is currently undervalued due to recent economic conditions, could enable a large amount of appreciation to be passed on tax-free.

If the gifts are income producing and are made to a grantor trust, income taxes paid by the grantor further reduce the taxable estate.

If you think a large gift before year-end might make sense for you, now is the time to consult with your tax advisor.

Paul Harms works at Hancock Askew & Co., LLP and can be reached at 912-527-1339 or pharms@hancockaskew.com.

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