THE FUTURE OF ESTATE AND GIFT TAXATION
An uncertain outlook for gift and estate taxation necessitates that families and their financial planners must stay abreast of the latest developments in Washington.
Gift and estate taxes have been in a state of flux since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, better known as the Bush Tax Cuts. This law slashed estate and gift taxes to 0% in 2010, but also provided that they revert to a maximum of 55% in 2011, virtually ensuring that the law would need to be revisited. In 2010, wrangling in Congress extended a lower estate and gift tax rate at 35% through 2012, after which it is scheduled to revert once again to a maximum rate of 55%.
|
Year |
Exemption |
Maximum Estate Tax Rate |
|
2001 |
$675,000 |
55% |
|
2002 |
$1 million |
50% |
|
2003 |
$1 million |
49% |
|
2004 |
$1.5 million |
48% |
|
2005 |
$1.5 million |
47% |
|
2006 |
$2 million |
46% |
|
2007 |
$2 million |
45% |
|
2008 |
$2 million |
45% |
|
2009 |
$3.5 million |
45% |
|
2010 |
-- |
0% |
|
2011 |
$5 million |
35% |
|
2012 |
$5.12 million |
35% |
|
2013 |
? |
? |
A Strategy for Preserving Wealth
These tax rates pose a significant burden for families and business owners who wish to pass property onto their children. Estate planning professionals have developed a number of compelling strategies to help minimize taxes and preserve wealth, including Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs).
FLPs allow individuals to include children and family members in the ownership of assets while limiting the ability of each family member to liquidate assets and customizing the role each individual plays in the management and control of the assets. A key benefit of FLPs is that they may allow individuals to pass assets to others at lower valuation levels. This is typically achieved by taking a valuation discount that accounts for the marketability and control restrictions inherent in limited partnership interests.
Using FLPs effectively means keeping up with best practices in valuation, since discounts can vary with the individual FLPs and their underlying assets. Since FLP valuation discounts are often challenged by the IRS, it is essential to attain high quality independent appraisals.
Wharton Valuation
Wharton Valuation has been providing valuation services for more than 20 years. Our team works with leading attorneys, accountants and financial advisors to help families demonstrate compliance with IRS guidance and regulations. Our team continually stays abreast of the latest taxation developments as well as the court cases that involve business appraisals, including the valuation of Limited Liability Companies and Family Limited Partnerships.