As many New Jersey residents are aware, Congress recently passed the American Tax Relief Act of 2012 (ATRA), which permanently enforces estate tax rules. This means that many individuals with estates worth over $5.25 million, particularly if they run a family business, may want to focus on a new estate planning strategy in order to sidestep a sizable estate tax. Many can still take advantage of the methods previously used to reduce or avoid estate taxes.
Business owners may want to look at gifting as a way to minimize or eliminate estate taxes. An individual who gifts business assets while he or she is still alive can avoid the federal estate tax on the income and appreciation accrued from those assets. Those who run a family business that does not involve their children can sidestep the estate tax by donating the business interest to charities and foundations. It is also possible to discount business stocks for transfer.
Parents who intend to pass down the business to their children also have some options. They can sell business shares to their children at a fixed low interest rate instead of passing it down through probate. Another option is to obtain life insurance outside of the estate through an irrevocable life insurance trust. The funds from the insurance can offset any estate taxes which could otherwise jeopardize the family business.
The challenges posed by the ATRA legislation may seem daunting, but New Jersey business owners who understand how they may be affected can make smart choices in their estate planning. Mitigating or avoiding the estate tax altogether may make a big difference in the future of their children and the business. Individuals may find it beneficial to carefully examine all their options in order to ensure that their loved ones get the maximum benefit from the estate.
Source: Forbes, "Want to Avoid the Estate Tax Cliff? Five Ways to Help," Steve Parrish, Jan. 30, 2013