New Asset Transfer Opportunities Created by Changes in Tax Law

Prior to the 2010 tax bill, the lifetime gift tax exemption was $1 million for individuals and $2 million for couples. The 2010 tax bill increased exemptions to $5 million for individuals and $10 million for couples. An additional $4 million exemption is available for donors who previously made gifts over the pre-2010 limit. The increases in the lifetime gift tax exemptions, coupled with lowered asset values due to the recession, will assist many succession plans.

There are tax advantages for transferring assets during one’s lifetime as many states do not levy a state-level gift tax and impose only a state-level inheritance or estate tax instead. By transferring assets prior to death, the state cannot impose its inheritance or estate tax on the gift.

Business owners who are not ready to relinquish control of their business but who are still open to giving gifts can recapitalize and create voting and non-voting stock. The owner can give away part of the non-voting stock and maintain control of the business with the voting stock. LLCs can use a similar tactic, reconfiguring the operating agreement and creating voting and non-voting membership units.

It is important that those wishing to capitalize on the 2010 bill act quickly as exemptions are set to return to $1 million for individuals and $2 million for couples on January 1, 2013. Additionally, assets may increase in value as the economy gradually recovers.

See David A. Ludgin, Tax Law Changes Create New Asset Transfer Opportunities, Family Business, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.