Category Archives: Wealth Preservation

2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes

Year End Income Tax Planning

Don’t Wait For A Last Minute Miracle:
Get Busy Now on Year End Tax Planning

As the year-end quickly approaches, there is still time to do some year-end tax planning.  This 2013 tax year will be tough on many taxpayers due to recent tax law changes and the uncertain future of tax reform.  Basically, taxpayers will have to deal with the following recent tax law changes:

  • Higher marginal income tax rates.
  • Higher capital gain tax rates.
  • Restoration of the phase out of itemized deductions and exemptions.
  • The new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains. etc.  For more details please read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.
  • The new 0.9 percent tax on earned income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly.
  • Same Sex Couples:  The recent Supreme Court decision in Windsor may result in same-sex couples with dual income paying more income taxes filing jointly than if they were still able to file singly.

As always, it is essential to know the customary year-end planning techniques that can cut income taxes.  It all starts with a tax projection of whether you will be in a higher or lower tax bracket next year. Once your tax brackets for this year and next year are known, there are two basic income tax planning considerations:

  • Should income be accelerated or deferred?
  • Should deductions and credits be accelerated or deferred?

However, life is never that simple.  Tax law uncertainty, always makes for some real guesswork.  As discussed below, when it comes to certain deductions that have tax threshold limitations, bunching of deductions to one year may force the timing into a tax year where the tax bracket is lower than the other tax year in question. But this may be the only way to get a tax break for these deductions.

As a further irritant, year-end tax projections must take into account the maddening alternative minimum tax and the new parallel universe of the 3.8% medicare tax.  Yikes.

For discussion purposes, the following strategies assume that the taxpayer’s income will be higher next year.  Where income will be taxed at a higher tax bracket next year, accelerating income to this year results in less taxes being paid.  At the same time deductions and tax credits deferred into next year will become more valuable as they offset income taxed at a higher marginal bracket.

Accelerating income to the current year and deferring deductions must take into account the impact on cash flow and the time value of money when paying taxes on income a year earlier.  However, due to our current low-interest rate environment, time value of money implications are quite minimal and may not be a significant consideration.

If a taxpayer expects income to decrease next year they should use the opposite approach.

So be sure to remember that the following lays out the basic ideas for income acceleration and deduction/credit deferral where income projects to be taxed at a higher level next year.

Income Acceleration: 

For taxpayers who think that they will be in a higher tax bracket next year, here are some targeted forms of income to consider accelerating into this year.

  • Bonuses: Receive bonuses before January 1 of the following year.  If your employer allows you the choice, this may result in some significant income tax savings to you.
  • Accelerate billing and collections.  If you report income on a cash basis method of accounting, immediately sending out bills to increase collections before the end of the year may result in significant tax savings if you know income will be much higher next year.
  • For Salary and Wages and Earned Income: Take Into Account the New 0.9% wage tax:  High income earners will pay an extra 0.9% in social security taxes on earned income above certain thresholds starting in 2013.  Where earned income is low this year and is going up next year, accelerating earned income into the current year may cut this wage tax on earned income entirely.
  • Redeem U.S. Savings Bonds, Certificates of Deposit or Annuities:  Taking these items into income this year may make sense where income projects to be higher next year. (Be sure there are no penalties or surrender charges involved.)  Also where income this year will be below the new 3.8 percent Medicare tax threshold, accelerating this passive income may completely avoid this Medicare tax.  For more on this read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.
  • Capital Gains: Selling appreciated assets if you expect capital gains at a higher rate next year:  In such situation it may make sense to sell such assets before the end of the year.  For a complete discussion of this issue please see 2012 Year End Tax Planning: Should Taxpayers Sell in 2012 Before Rates Rise?  

Example:  Mr. Appreciation has low basis stock that has appreciated in value. The rate for capital gains can rise as taxable income increases.  So before selling any securities he needs to run the numbers to see if it makes sense to sell this year or next year or spread such sales between the two years. He also needs to consider in the 3.8 percent surcharge on capital gains and how such decision impacts itemized deduction limitations.

Important Planning Point:  For an older taxpayer or one in ill-health, this strategy may not make income tax sense.  When a person dies their assets get a step up in basis to the date of death value.  As a result, when the estate sells such assets there is no capital gain.  So a sale right before death would trigger a needless capital gain tax.

Planning Note:  The wash sale rules do not apply when selling at a gain, so taxpayers can cash out their gains and then repurchase identical securities immediately afterwards.

  • Complete Roth conversions.  Taking into income the monies in IRA accounts in a year before your tax bracket is due to rise may make for some significant tax savings.
  • Accelerate debt forgiveness income with your lender.  In addition to being taxed at a lower tax bracket this year, acceleration also may make sense because of the possibility that tax law reform may end this tax break.  See Expiring Provisions below.
  • Maximize retirement distributions.  Remember the minimum required distributions (MRDs) are the amounts distributed each year to avoid the draconian 50% MRD penalty.  However, taxpayers with IRAs can choose to take larger distributions this year to have such income taxed at a lower income tax rate than the one projected in future years.
  • Electing out or selling outstanding installment contracts.  Disposing of your installment agreement may bring the deferred income into this year at a lower tax rate than anticipated in future years.  It may be helpful to pay tax on the entire gain from an installment sale this year by electing out of installment sale treatment under Section 453(d) of the Internal Revenue Code, rather than deferring tax on the gain to later years.  Conversely, in certain situations installment sale treatment may be a better option since it allows for spreading of income over multiple years.  So it really depends on the specifics of each taxpayer’s tax situation.
  • Take corporate liquidation distributions this year.  Senior or retiring stockholders contemplating the redemption or sale of their shares of stock in their corporation can save considerable taxes by selling their shares this year if their expected tax bracket will be higher in later years.  Warning:  On the other hand consider carefully the step-up in basis implications for older or infirm taxpayers before considering this tax maneuver.

Deductions and Tax Credit Deferrals:

For taxpayers who think that they will be in a higher tax bracket next year, here are some actions to consider in deferring deductions into next year.  Remember, we are assuming that income will be higher next year, so deductions are more valuable next year.  (Obviously, if income is higher this year, it is better to have deductions accelerated into this year).  In any event, taxpayers must watch out for the impact of the alternative minimum tax.

  • Bunch itemized deductions into the year in which they can exceed the applicable threshold.  For certain expenses such as elective surgery, dental work, eye exams, it would be better to have it done in the year that you are already above the applicable AGI threshold.
  • Where income will be greater next year, taking the standard deduction this year and bunching itemized deductions to next year would yield an optimum tax result.
  • For medical expenses, the adjusted gross income (AGI) limitation rises to 10% in 2013 for those under age 65.  Those over age 65 still have an AGI limitation of 7.5%.  Taxpayers at age 64 this year and 65 next year may want to bunch elective medical procedures into next year to get over the lower threshold next year.
  • Postpone paying certain tax-deductible bills until next year to generate a greater tax benefit.
  • Pay fourth quarter state estimated tax installment on January 15 of next year.
  • Postpone “economic performance” for tax-deductible expenses until next year if you are an accrual basis taxpayer.
  • As mentioned above, watch the AMT. Missing the impact of the AMT can make certain year-end strategies counterproductive. For example, aligning certain income and deductions to cut regular tax liability may not work if the deductions reduce regular income but do not cut alternative minimum taxable income.  It is very easy to have your tax planning backfire by missing the difference between the regular tax and AMT tax rules.
    • Example and Important Warning: Do not prepay state and local income taxes or property taxes if subject to the AMT.  It will generate no income tax savings.
  • Watch net investment interest restrictions.
  • Match passive activity income and losses.
  • Harvest tax losses by selling securities or mutual funds.  Selling shares of stock or mutual funds that have gone down in value can offset capital gains and generate a tax loss of up to $3,000 against other income.
    • Warning: If you want to buy back the same security beware of the so-called “wash sale” rules.  These rules are complex but with proper planning losses can be taken while avoiding the wash loss limitation rules.
  • Purchase machinery and equipment before the end of 2013.  Even if you are in a higher tax bracket next year, it may make sense to take advantage of the generous current Section 179 deductions and 50% bonus depreciation.  These tax breaks may not last past 2013.  Or they may be significantly reduced next year.

Other Strategies:

  • Credit Cards To Claim Deductions:  Expenses charged to credit cards before year-end are deductible this year even though paid next year.  Use credit cards to pay:
    • Business Expenses
    • Medical Expenses
    • Property Taxes
    • Other deductions
  • Increase Withholding:  Many taxpayers pay both estimated taxes and withholding taxes. If you have fallen behind on quarterly estimates, it may be a good idea to increase withholding on your remaining wages to avoid underpayment penalties.
    • Key Tax Planning Point: The IRS treats withheld taxes as if spread out evenly throughout the year. This strategy can cut or even eliminate penalties for the failure to pay timely.
  • Do not invest in mutual funds at year-end:  Many mutual funds pay accumulated dividends and capital gains in November and December.  This will result in a needless tax bill and a rude surprise come tax time for the unknowing investor.

Expiring Provisions:

In the past, Congress has extended many, but not all, expiring provisions to future years.  However, there is a lot of uncertainty now as there is talk of major tax reform and still out of control budget deficits.  Prudence may dictate the possible loss of some of the following tax provisions:

  • Sales Tax Deductions:  This deduction has an uncertain future.  So for those in low or no income tax states or who are contemplating a very large purchase, completion before year-end may be warranted.
  • IRA Distributions To Charity:  This provision also faces an unknown future.  Currently, the tax law allows those age 70 1/2 and older to make required distributions directly to charity.  This allows them to avoid income taxation on such distributions.  Note: They do not also get a charitable deduction for such contribution.
  • Discharge of Principal Residence Debt:  Taxpayers who get discharged from debt on their home can avoid being taxed on this form of income.  Those taxpayers involved in a foreclosure should complete this transaction before year-end in the event this law is eliminated next year.
  • Other Expiring Tax Breaks where the taxpayer may want to consider paying before year-end:
    • Residential Energy Property Tax Credit
    • Qualified Tuition Deduction
    • Contribution of Real Estate for Conservation
    • Teachers Classroom Deduction
    • Qualified Tuition Deduction
    • Van-pooling or Mass Transit Benefits
    • Mortgage Insurance Premiums

Final Thoughts and Warnings:

Remember that these are just some of the major year-end income tax strategies and are not all-encompassing.  Taxpayers must take into account possible tax law changes for next year and last-minute tax laws enacted before year-end.

Most importantly remember that income tax strategies depend on the specific income or expenses of each taxpayer and their overall income, gift and estate tax setting.  This discussion offers some, but not all tax strategies.

The one certainty in this uncertain tax environment is to “run the numbers” to find the best approach for each taxpayer’s particular tax and financial situation.

As always, it is quite beneficial to have tax counsel look at the details of your particular income tax situation to carve out specific tax strategies to cut taxes owed.

I hope this article has been of value to my readers. Please feel free to contact me, ask a question or make comments below.

Hurricane Sandy: Tax Deductions For Casualty Losses

Hurricane_Sandy_Marine_hoists_in_Staten_Island,_N.Y.My last post talked about when we can trash tax and other important records. Well, Hurricane Sandy brought a whole new meaning to the concept of trashing records and a whole lot more.

Experts estimate that Hurricane Sandy has caused $50 billion of damage.  Eqecat Inc., a financial advisory firm out of Oakland, California predicts that insurance will cover $10 to $20 billion of such losses.  Storm victims will be on the hook for the other $30 billion of losses.

A couple of points to keep in mind before talking about the casualty loss tax implications:

  • If your house is damaged from this disaster, contact local building authorities to see if the home is inhabitable,
  • Establish an insurance claim, but don’t settle immediately,
  • Make temporary repairs and take other remedial action to prevent further damage to homes and belongings, and
  • Take photos of the damages.

With so many lives in complete turmoil, many of us on the East coast  crushed by Sandy’s wrath are not thinking of  claiming a casualty loss for tax purposes. However, knowing about how taxpayers can claim tax deductions under casualty loss provisions of the Internal Revenue Code is essential in dealing with insurance companies.  While memories are fresh and evidence is still available, now is the time to develop, document and support such casualty losses.

To aid those affected by this devastation readers should look at my article entitled Casualty Losses For Hurricane Sandy.  This article details  the tax qualification rules for being eligible for casualty losses.  It is a must read for anyone devastated by Sandy.

Helping Elderly Parents with Their Finances and Estate Plan

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Estate Planning For Elderly Parents

As our older parents age it is harder for them to deal with the financial details of their lives. With the complicated financial products out there and the low-interest rate environment it becomes very difficult for them to make sound financial decisions. In addition, dealing with one’s own mortality can prevent parents from focusing on their estate plan. As many know, if they fail to have a will, trust or overall estate plan, the state will decide who gets their wealth via the laws of intestate succession.

The situation becomes even more acute in those many cases where there are second and sometimes third or more marriages. Most of these couples do not appreciate the problems that can occur for the surviving family members. A Russian Roulette situation can arise for the families depending on who dies first. Planning and careful drafting is almost certainly necessary in these situations to avoid family warfare and large and usually inevitable litigation costs. Couple this with the emotional toll that these situations engender, you can readily see why estate planning is so vital.  (For more on the estate planning process readers should explore Estate Planning Mistakes: 5 Not So Easy Pieces)

The point here is that children need to help their parents in getting their financial and estate plan in order. However, they must tread very carefully to avoid having their parents think they are acting in a self-serving way. Additionally, children should carefully deal with and tell their siblings of such involvement to avoid any later challenges of overreaching, duress, fraud and undue influence.

So how does one talk with their elder parents about these important issues? To get some ideas about how to approach parents on these vital issues please read my article entitled Estate Planning for Elderly Parents: Discussing Finances and Estate Planning with Your Aging Parents

Copyright © 2012 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.

Failing To Update Retirement Plans: How to Avoid IRS Plan Disqualification & Penalties by Using VCP

In our fast paced world, many retirement plans are drafted and then often neglected.  In extreme cases, plans are put aside without ever being updated.  Some plan sponsors have failed to restate their plans for years or even decades.  For many individuals, retirement plan accounts represent the largest portion of their wealth.  As the following discussion will illustrate, the failure to protect this most valuable and important asset by keeping the retirement plan in full compliance with applicable retirement plan laws could result in some very nasty, costly and unforeseen financial repercussions.

The retirement plan laws have always required that plans be updated for tax law changes.  Before 2003, the IRS allowed plans to be periodically restated for tax law changes that occurred over many years.  This resulted in large, periodic major plan restatements.  However, since 2003 the IRS has required amendments to retirement plans for each new tax law resulting in more frequent “interim amendments.”  [For those of you interested in a more detailed discussion of these required interim amendments since 2003, please go to my questions answered at my Linked-In profile.]  For many plans, the deadlines for many of these plan restatements or interim amendments have now expired.  Current rules provide that plans that have not been redrafted to comply with required prior restatements or interim amendments cease to be qualified as of their applicable deadlines.

In the worst case scenario, the IRS may demand that the plan be retroactively disqualified.  If the IRS is successful in disqualifying the plan, the plan sponsor’s tax deductions for contributions taken in the year of disqualification and in later years would be disallowed.  The taxes owed by the plan sponsor due to the disallowance of previously claimed retirement plan deductions plus applicable interest and penalties could be enormous.  In addition, participants of the plan would have to treat as taxable income the value of their plan account as of the date of such disqualification.  The taxes, interest and penalties to the participants from the date of plan disqualification could be equally exorbitant. This would be a truly disastrous and harsh result for both the employer plan sponsor and participants in the disqualified plan.

However, in most cases, the current policy of the IRS is to impose monetary penalties instead of the more severe penalty of plan disqualification.  Even so, when the IRS raises these failures as the result of an audit the penalties can be quite severe.   Penalties can range from $2,500 to $80,000 depending on the failures involved and the size of the plan.  It is worth noting that in recent years, the IRS has increased its auditing of retirement plans.

 Here is Good News: How to Solve This Looming Problem 

The IRS has a voluntary remedial program called the VCP (voluntary compliance program) to correct these plan document deficiencies.  The IRS position is that retirement plans may be re-qualified only by having the plan sponsor voluntarily come forward before an IRS audit by submitting the newly drafted delinquent restatements and/or interim amendments to the IRS in accordance with some very detailed procedures and documentation pursuant to Revenue Procedure 2008-50.  Once the IRS reviews and hopefully approves the application and the newly drafted required documentation, the plan is deemed to be in full compliance with applicable law and such plan is retroactively tax qualified.

Instead of paying a steep monetary penalty, the VCP submission results in the paying of a filing fee to the IRS.  Sometimes, if the violation is quite limited the filing fee can be as low as $375.  (Remember, you will still need to pay for documentation services associated with plan restatements and interim amendments.  However, these costs would have been incurred in any event to keep your plan in full compliance with the law.)  The important point here is that the use of the VCP program avoids the risk of plan disqualification or the imposition of a large monetary penalty.

 How We Can Help:

Numerous VCP program applications under the applicable Revenue Procedure 2008-50 have been submitted by this office.  This application along with the needed plan restatements and interim amendments must be carefully drafted to ensure efficient negotiations and a successful outcome with the IRS.

The Bottom Line:

Plan sponsors should immediately and voluntarily move to correct plan deficiencies pursuant to the more taxpayer friendly and cheaper VCP program before the IRS audits your plan.  Once the IRS commences an audit, the VCP submission strategy is no longer an option and your plan is exposed to disqualification and/or severe monetary penalties.

Looking forward, you must establish a program with your plan adviser to ensure that your plan is kept in compliance with the laws concerning plan restatements, interim amendments and the changing IRS submission requirements and deadlines.  This will avoid having to deal with all of these problems again in the future.  In fact, the Revenue Procedure requires a disclosure in the VCP application as to what new procedures the plan sponsors will use to avoid this problem in the future.

 Do Not Wait

Do not wait for the IRS to audit your retirement plan as it then will be too late to get the cheaper and less painful VCP deal.  For a free initial consult to assess your retirement plan situation, please do not hesitate to call me, Steven J. Fromm, Esquire at 215-735-2336.  All consultations are confidential and covered by attorney-client privilege.

Copyright © 2009, Steven J. Fromm

Michael Jackson & Farrah Fawcett: Estate Plan Wake Up Call

In the wake of the sad and tragic deaths of Michael Jackson and Farrah Fawcett, we are all reminded how fragile our lives can be and how quickly things can change. The death of these two iconic figures should be a call to many to put their estate plan in order. It should be noted that the reality is that most people die without wills in our country. Some really smart and famous people, Abraham Lincoln, Howard Hughes, and Pablo Picasso, die without taking the time to draft a will.

Many of us procrastinate, minimize our personal need or the legal importance of drafting wills, trusts, living wills, and durable powers of attorney. The complexities of combining and coordinating diverse assets such as individual assets, jointly held assets, retirement plans, life insurance, annuities and business interests seem just too daunting for some. For others, they do not realize the importance of looking at all of their assets from an overall perspective; namely, when all is said and done who ends up with what.  Is the division of assets fair and equitable to all concerned after the payment of taxes, debts and estate administration costs?

For many, Michael Jackson’s untimely death has raised these and many other estate planning issues. At this point, no one knows whether he had a will and/or trust for his kids, or whether his estate plan was up to date. But by looking at his situation (and speculating a bit), some important estate planning considerations for the rest of us can be explored:

Guardianship: It is unclear what provisions Mr. Jackson had in his will (assuming there is a valid will) for his children. The early word from the media is that this will be a messy battle in the courts over the issue of guardianship of his children, even if his will indicated his preference for guardian.  Even if  challenged, the designation of guardian in a will would still be a very significant factor in any court challenge and laying out your wishes is always a prudent thing to do in any event.  The object lesson is clear: Parents with young children clearly should see the need for a will that indicates their choice of guardian for their children.

Trusts: No one knows whether Mr. Jackson had set up trusts for his children. Although it appears that his estate is now insolvent, this situation will probably change with post-mortem sales of his music someday providing assets and wealth for his children (think after-death income of the Elvis Presley estate).  Hopefully, he set up trusts that will protect and manage his assets.  To increase the possibilities of becoming competent adults, perhaps he drafted provisions in his trust in a way that develops their sense of personal initiative and responsibility yet still provides for their basic needs.  Experienced estate planning attorneys explore this type of forward looking planning when it comes to dealing with children and their anticipated needs if parents die prematurely.

Specific Bequests: The media has speculated that a very large asset of his estate (his Beatles song rights) was gifted to Paul McCartney. This generosity may be commendable, but from an estate planning perspective this bequest may raise problems. First, if his estate is in fact insolvent, this bequeathed asset would not be available to his estate to be sold and the proceeds used to pay down estate debts and/or benefit his children. Secondly, generally, bequests like these are often times given in a way that they bear no estate taxes. This could distort how the assets are divided between beneficiaries. The point here is that this bequest may have made sense when the will was originally drafted when Mr. Jackson was wealthy, but this bequest could be quite problematic in the current situation. The lesson here is that an estate plan needs to be looked at periodically as the family needs and financial situations change over time.

Special Needs Trusts: Farrah Fawcett died leaving a son who is in jail with addiction problems. The issues for people with children with special needs is often minimized, overlooked or not fully considered. As her only child, did she leave all of her wealth to her son? Did her will provide that he was to get his inheritance at her death or did she provide for a trust for his benefit? If she established a trust, what kind of provisions and conditions did she make in providing benefits to him? These tough questions arise not only for children with addiction issues, but for children with cognitive impairments, physical disabilities and emotional issues.  In addition, special needs trusts may be required where children are receiving public assistance from state and local governments.

The Bottom Line: Protect your family and protect your hard earned wealth. Spend the time to plan your affairs with an experienced estate planning attorney.  Remember, if you die without a will and trust, your state intestacy laws will control who will get your assets and how they get your assets. When young children are involved, courts generally place the children’s inheritances in trust in accordance with what a judge deems appropriate.  In addition, the judge will determine who will be the trustee of any trust they impose on your children and they will determine who should be the guardian of your children. These and other important considerations should be determined by you and not by a court of law, so do it and do it now so you do not leave problems like the ones Michael Jackson and Farrah Fawcett may have left behind.

© Steven J. Fromm, 2009

THE SILVER LINING OF A BAD ECONOMY: GIFTING OF SHARES OF STOCK IN A CLOSELY HELD BUSINESS

As with most things in life, when things are bad, there usually is something good that can come out of it.  Our current economic troubles have resulted in many closely held or small businesses being worth far less then they used to be.  This is not a good situation for businesses that are hanging on to survive or have to be sold for various reasons.  However, for people wanting to minimize estate and gift taxes and have been putting off taking a cold hard look at their estate plan, now may be the perfect time to explore the gifting of shares in their businesses.

For example, some businesses have senior family members who own all or most of the shares of the outstanding stock of their corporation.  With the value of the business being down right now, more shares could be gifted to younger family members involved in the business.

Example:  Mr. Senior owns 80% of Deflated, Inc., while his two sons who work in the business own 10% each.  Deflated was worth $3,000,000 in 2007.  By the end of 2008, it was worth $2,500,000.  Mr. Senior talks to tax counsel and after exploring the tax strategies and planning tools discussed below decides to gift 20% of his shares worth $500,000 to each of his sons, leaving him with a 40% stock interest.

The tax advantages are as follows:

1.  The stock gifted to each son was previously worth $600,000. The current market value of such stock to each son is now only $500,000.  If Deflated, Inc. goes back to its value once the economy recovers, then Mr. Senior has just transferred $200,000 ($100,000 to each son) to his sons estate and gift tax free.  At a current marginal estate tax rate of 45%, Mr. Senior’s family can save $90,000 (45%*$200,000).

2.  The gifts to each son are gifts of a minority interest in Deflated, Inc. and such gifts lack marketability due to the limited market for such shares.  Estate and gift tax rules allow discounts for these factors that reduce the value of assets transferred.  (Caveat: There are some legislative proposals being floated in Washington seeking to limit this tax strategy. Stay tuned.) These discounts for minority interests and lack of marketability conservatively can be 25%, sometimes more.   With such discounts the gift of each $500,000 is reduced by $125,000. At a current marginal estate tax rate of 45%, Mr. Senior’s family can save another $112,500 (45%*$250,000).

3.  Outright gifts of stock are eligible for the annual donee exclusion of $13,000.  In addition, Mr. Senior has a spouse who will join in this gift, which will allow for a second $13,000 exclusion.  So the taxable gift to each son is now reduced by $26,000 (Mr. Senior’s annual exclusion of  $13,000 and his spousal joinder of another $13,000).  Additional savings to the family is $23,400 (45%*26,000*2 sons).

4.  If Mr. Senior makes no further gifts and dies with his reduced ownership interest of 40%,  his estate can claim the minority interest and lack of marketability discounts against his remaining shares.  If Mr. Senior dies in 2014, when deflated is worth $4,000,000, his family can take a 25% lack of marketability/minority interest discount, saving his family another $180,000 (45%*$400,000 marketability/minority interest discount[$1,600,000 forty-percent interest*25%]).

Bottom Line:  Mr. Senior can take advantage of the lousy economy, the lack of marketability and minority interest discounts and the annual donee exclusions with a spousal joinder to save his family a tremendous amount of future estate and inheritance taxes.

Caveat:  Remember that this type of planning depends on the particular factual setting of each client.  One difference in the facts can change the outcome.  Also, be aware that state inheritance taxes have not been considered in the above example.  Finally, the above should not be considered as legal advice.  Please consult with tax counsel to discuss your particular factual situation.

Copyright © 2009, Steven J. Fromm.