Estate Planning Makes Tax Sense

fordbergner Uncategorized Leave a Comment

Start planning now to protect the assets that you’ve spent long years earning
By Jackie Ingles

“Anyone with substantial assets in a small business should consider making gifts of their interest in the business during their lifetime to their children . . . If done correctly, the business owner can remove these assets from his estate while still maintaining control over the company until the point at which he is ready to relinquish control to his children.” -Don D. Ford III


Small business owners realize that with today’s complex and ever-changing tax structure, it’s not always a simple process to turn over the reins of a company to heirs or partners. Strategic estate planning and practical tax advice are always needed if your goal is to keep the business in the family or transfer it to a partner. Business owners without a solid estate plan might find their businesses will be subjected to inordinate federal taxes, leaving the family or partners paying as much as 55 percent of the estate’s assets in taxes.

Every successful business owner should engage a professional, certified estate planner to ensure that all probate issues in the event of the death of a business owner, spouse or partner are handled in a proficient and cost-effective manner. In addition, businesses should have a succession plan for passing the ownership of the business to family members or partners.

Don D. Ford III, Ford-Bergner LLC, with offices in Houston and Dallas, is a board certified attorney specializing in estate planning. “Anyone owning a small business or substantial interest in a small business needs a solid plan for what happens to the business if the principal were to die suddenly,” says Ford. “This planning might include a buy/sell agreement with other shareholders, or it might include a mechanism for later generations of the owner’s family to take over and manage the business.”

A will is the obvious starting point for all estate planning. It allows the principal to appoint an executor and craft final instructions to be carried out. Probate court oversees the administration of the will including distribution of property to heirs, tax liability of the estate, distribution of the estate’s assets and discharging corporate and personal liabilities.

Probate costs vary from state to state and can be as high as 5 percent of the value of the estate. For that reason, many small companies, organized as a sole proprietorships, can avoid costly probate by establishing pay-on-death accounts and registrations that allow some personal property and bank accounts to go directly to the beneficiary. And, some partnerships can avoid probate by signing a joint ownership of property form and specifying that in the event of one partner’s death, the remaining partners inherits the entire business. A carefully laid out personal will is the foundation of the planning process and, when properly crafted, can substantially limit tax liabilities of the estate.

Be aware of changes

Small business owners should familiarize themselves with a few key tax exclusions that might afford tax relief for their estates. However, these exclusions are fluid and are always subject to change. All long-term estate planning operates on the whims of Congress that, of course, can be short term.

For the past 11 years, estate planners have anxiously awaited the government’s clarification on the amounts of tax-free money that a business owner could pass on to their spouse. The “American Taxpayer Relief Act” of Jan. 1, 2013, included legislation making permanent an estate tax exemption of $5.12 million for each spouse and a top tax rate of 39.6 percent.

Business owners would be mistaken to think that because their assets fall below this threshold that they needn’t worry about managing their estate; indeed, 10 years ago this exemption was only $1 million and the top tax rate was 49 percent. Laws are always subject to change, and inflation and business expansion will cause even a modest estate to exceed current values in a very short time period. Estate planners factor in these options and keep the estate current with changes in tax laws and estimate the relative value of the firm’s assets and increased business activity.

A key provision of the tax code, the gift-tax exclusion, allows a business owner to give up to $14,000 a year to anyone they might chose; there is no limit on the number of family members or associates that might receive this tax-free gift.

Gifting strategies

Ford explains, “Anyone with substantial assets in a small business should consider making gifts of their interest in the business during their lifetime to their children. By utilizing various gifting strategies, the gifts can be completely free of any taxes, and the owner can generally gift away portions of the company at a discount – meaning that he can give away larger amounts of the company each year without incurring taxes. If done correctly, the business owner can remove these assets from his estate while still maintaining control over the company until the point at which he is ready to relinquish control to his children.”

In effect, a business owner with two children and three grandchildren can gift $90,000 each year tax-free to the family ($14,000 X 5). In addition, the spouse can also gift these same amounts, doubling the amount to $180,000 each year. However, these gifts are deducted from the $5.12 million lifetime exclusion. The executor handling the estate of the spouse who died must transfer the unused exclusion to the survivor, who can then use it to make lifetime gifts or pass assets through to his or her estate. The prerequisite is filing an estate tax return when the first spouse dies, even if no tax is owed.

“A surviving spouse can carryover any unused portion of the deceased spouse’s exemption in place, at the time of death. It is not an automatic carryover however. The surviving spouse needs to have Form 706, Federal Estate Tax Return completed and filed timely for the deceased spouse,” says Debra Harrington, CPA, Baer & Edington LLC, Columbia and Jackson, Mo.

Many business owners have life insurance that they assume will provide for their family after death. However the life insurance amount might be subject to federal taxes. To avoid this possibility, many planners will suggest that business owners transfer their life insurance into an irrevocable life insurance trust (ILIT), whereby the trust purchases the insurance policy; therefore, the life insurance is not a part of the business owner’s estate and not subject to estate taxation.

Ford further explains, “Upon the death of the insured, the insurance pays into the trust, not into the deceased’s estate. Because the deceased does not own the asset, the insurance is not included in his estate for estate tax purposes, and therefore, no tax is paid on the insurance proceeds. Many times, families owning a small business might have a substantial value in the assets of the business, but not substantial cash to pay estate taxes. The ‘free’ cash generated by the ILIT can be used to pay the estate taxes and avoid having to liquidate any of the business assets after the death of one of the principals.”

Harrington favors an irrevocable joint trust, for married partners, whereby both parties are co-trustees. These types of trusts are most common in community property states. Harrington suggests, “Married couples should consider setting up a joint revocable trust. This ensures that after the first spouse dies, the trust remains revocable and all the assets will be in the surviving spouse’s estate and get a stepped up basis adjustment (original cost of property) at their death.”

If all this seems too complex, remember that congress is promising simplified tax reform for later this year. Changes in the political climate might exacerbate these favorable estate laws. Only a certified estate planner can ensure that the business does not suffer financial hardship in the event of the death of the principal or a partner. That’s just good business.

Jackie Ingles is a writer, editor and freelance partner with her husband, Mike. She lives and works in Columbus, Ohio, and can be contacted at

Leave a Reply

Your email address will not be published. Required fields are marked *