ESTATE TAX PLANNING

Now may be the best time in recent memory to benefit from estate tax planning if you own a closely held business or if you have a taxable estate. Call your primary contact at Berntson Porter & Company to determine whether this is a good time to take action to minimize your estate taxes.

In general, you can make current tax-free gifts of up to $10,000 ($11,000 in 2002) per year per spouse to as many beneficiaries as you choose. These gifts reduce the value of your taxable estate for purposes of the death tax calculation. In addition, every individual is allowed a lifetime exclusion of $1,000,000, beginning in 2002, ($2,000,000 for a married couple with proper estate planning) for gifts in excess of the current $10,000 annual gift tax exclusion.

If a gift is an interest in your business, you might derive other significant benefits as well:

• Fair market values are depressed today for many closely held companies because sales and earnings are down. Valuation multiples, similar to price/earnings ratios for publicly traded stocks, are also down compared to recent years. When lower earnings and lower valuation multiples are applied to a closely held company the resulting fair market value is often far below where it would have been even a year ago. This is good for gift and estate tax purposes.
• The fair market value reported to the IRS for gifts of business interests is usually further reduced by discounts for both lack of control and lack of marketability. Discounting provides even greater tax savings bang for the gift buck. This complex and technical area is one where we have the experience and skills to get you the maximum legal benefit.
• A current gift at a "depressed" fair market value transfers the future appreciation of your business to your beneficiaries.
• Preparing a business valuation near year end enables you to lock in the gift value for both 2001 and 2002 if you make a second gift at the beginning of 2002. You get double gift benefit from one valuation.

Other actions to consider if you have a taxable estate include:

• Implement Wills or Revocable Living Trusts to take advantage of each spouse's $1,000,000 gift tax exclusion and the estate tax exclusion. The estate tax exclusion will increase in future years and the estate tax will be fully phased-out in 2010. In 2011, the gift and estate tax exclusions will revert back to pre-2001 Tax Act amounts unless Congress takes further action to permanently eliminate estate taxes.
• Update your Will or Living Trust and Durable Powers of Attorney and make sure beneficiary designations for your insurance and retirement plans are appropriate. A review of your documents by a qualified attorney is critical after the recent law changes. A legal review helps to ensure that your documents are in compliance and that your estate pays the minimum legal tax due upon death.
• Establish an Irrevocable Life Insurance Trust to purchase life insurance on you and/or your spouse to pay estate taxes owed upon your death by your heirs and beneficiaries.
• Make gifts of your residence or vacation home over a period of years with a Qualified Personal Residence Trust (QPRT).
• Create a Qualified State Tuition Plan (referred to as a Section 529 Plan) to reduce taxes while helping to pay for educating children and grandchildren.
• Create a Living Trust to hold and manage your assets. As trustee, you retain control of the assets during your life. Upon your incapacitation or death, a successor trustee of your choosing can assume management of the trust assets without requirement for additional legal action.

Please contact us at Berntson Porter & Company to discuss your specific situation. We can look at the details and advise you whether this is a good time to take action to minimize your estate taxes. Although this area is complex and deals with death and taxes, you can realize significant tax savings, gain control over your estate, and create benefits for your beneficiaries by taking action now.

Allan Vander Hamm, CPA, ABV