There’s no reason that odd couple has to stay together.
Benjamin Franklin reminded us that nothing is certain except death and taxes, and history proves him right. However, there is no rational reason the two should be linked and in fact much progress has been made in taking the tax sting out of death.
Dead and buried
The Indiana inheritance tax was repealed effective 2013. From that time forward, there is no reason to worry yourself, your heirs or your business with the burden of Indiana Death Taxes.
Powerful Pain Killer: the Federal Exemption
With the federal estate tax exemption at $5,430,000 for the balance of 2015 (and to be adjusted for inflation in 2016) plus two additional concepts for married couples–the marital deduction and portability–there doesn’t have to be any federal death tax when the first spouse dies. At the second death, it should be possible to shelter almost $11,000,000 of assets from taxation. To gain full benefit of these tax advantages, some estate planning is appropriate. See your attorney.
Reducing Unavoidable Pain
What if your combined estate is more than $11,000,000? There are several techniques your attorney can assist you with, maybe even providing a pain free or at least an almost pain free result. Consider:
* Valuation Discounts. If you own a business, one very important estate planning technique is to divide ownership among family members. A common strategy is for Owner to give Daughter 1 percent and split the balance with Wife. Owner retains a minority interest (49 percent). At death, the IRS will likely recognize a minority interest discount. This discount can be coupled with a second discount: lack of marketability. Closely held businesses do not trade like publicly held stock. A sale would have to be negotiated and hence is not “readily marketable.” With these two discounts, it is often possible to reduce the total estate’s value below the exemption. There are some technical requirements that have to be met when dividing ownership among family members. This should only be undertaken after careful review by your accountant and attorney.
* Paying on the Installment Plan. If your business is so valuable that even the exemption, portability and discounts aren’t enough to save you from the tax collector, then you might want to consider paying the piper over time. Section 6166 of the Internal Revenue Code permits estates where a closely held business is a large percentage of the estate to pay whatever tax is due over as many as fourteen years. The government charges only a modest interest rate (currently about 2 percent). Even if a hefty tax is due, this option might save your business from having to be sold.
Believe it or not, the federal estate tax structure has an important benefit for a decedent’s heirs. Whether or not you owe a tax payment, current law permits the cost basis of all of decedent’s assets to be adjusted to the date of death value. Take the case of a person starting a business from nothing 20 years ago. Assume at his death, the business is worth $8,000,000. That business will qualify for a “stepped up cost basis.” If Son sells the business two years later for $10,000,000, only the post-death appreciation ($2,000,000) will be subject for capital gain tax. To have a clear record of that basis adjustment, it might be wise to file a federal estate tax return even if no tax is due.
While people often tell horror stories about the forced sale of businesses at the death of the owner, these days (with a little planning) death taxes are not likely to be a major reason. Much more serious is the lack of a realistic management succession plan, but that’s a subject for another time.
Calvin Bellamy is a partner within Krieg DeVault‘s Financial Institutions, Estate Planning and Business Practice Groups.