Tax law changes that may affect succession planning

The "death tax" is dead - or so headlines proclaimed after President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001. But beware. As the cliché goes - the devil is in the details.

Here are five estate and gift tax changes that may impact succession planning by your family owned construction business.

1. Estate tax rates decrease and/or exemptions increase each year. Estate taxes are completely repealed for 2010 only. If Congress doesn't reinstate the repeal, the estate tax rate will jump to 55 percent, and the amount of the estate exempted from taxes will become $1 million in 2011. But if your loving business heirs have decided to knock you off before 2011 to take advantage of estate tax savings, warn them to check changes in capital gains rules first.

2. Heirs' capital gains taxes may increase. Currently, an asset transferred at death has a tax basis equal to the fair market value of that asset on the date the decedent dies. When the estate tax is repealed in 2010, the tax basis of the asset will become its original cost. This change may significantly increase your heirs' capital gains taxes on sales of appreciated assets, subject to exceptions, and will augment the need for good record keeping for asset acquisitions.

3. Qualified family-owned business exclusion was repealed in 2004. Loss of this exclusion may be a blessing because of its complex eligibility restrictions. For example, under the old law, if at least one qualified heir didn't materially participate in the business for at least 10 years following the business owner's death, estate tax savings had to be "recaptured." That is, the estate taxes had to be paid.

4. Credits for state estate taxes are converted to deductions. Currently, estates may reduce their federal estate taxes by claiming a credit equal to the amount of state death taxes paid, subject to limitations. The new law decreases the maximum tax credit allowed each year, then converts the credit to a less taxpayer-beneficial deduction in 2006.

5. Separate tax rate and exemption apply to gift taxes. Though death taxes die - temporarily? - in 2010, gift taxes survive. The gift tax rate will decrease in step with the estate tax rates until 2010, when the maximum gift tax rate will become 35 percent. The lifetime exclusion for gift taxes  increased to $1 million in 2002 and remain there. When you reach the gift threshold, rather than gifting your business assets, you may consider retaining them in your estate or restructuring your business to avoid taxes altogether.

* * *

Clearly, the new tax law is filled with helpful and harmful changes that will become applicable in different years. Now's the time to create, or review and update, business succession and estate plans.

Contact Susan Baughman for assistance. We have studied the new law and are here to help you take advantage of a plethora of tax-planning opportunities.