CONSTRUCTION Accounting ARTICLE -
Seize the Moment When It Comes To Gift Taxes
Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants
Giving away money in an economy that remains challenging for many contractors may seem a hard-to-swallow concept. But, from an estate planning perspective, “gifting” to family members now can help lower your estate’s taxable value with a less severe impact.
Current estate and gift tax rules allow you to give a substantial amount without incurring taxes — and they lower the tax rate for gifts beyond that dollar limit. In their existing form, these rules expire at the end of 2012, so now’s a good time to consider how gifting opportunities could affect your construction business and benefit your personal estate.
Gift tax 101
The gift tax has two exemption levels. First, gifts of less than $13,000 fall under the annual exclusion amount, which means you can give up to $13,000 annually per individual to as many people as you like and not trigger tax consequences.
If you give more than $13,000, it will count toward your gift tax lifetime exemption. For 2011 and 2012, this exemption is $5 million (indexed for inflation in 2012). So you can give up to $5 million in gifts during your life before you have to pay the gift tax. That figure is significantly higher than in past years, when it topped out at $1 million. Once you hit the $5 million mark, additional gifts are taxed at 35% in 2011 and 2012, down from 45% in past years.
The gift tax is “unified” with the estate tax, a tax paid on all of your assets above a certain threshold after your death. The unified system means that any portion of your gift tax lifetime exemption that you don’t use during your life will offset your estate tax. The estate and gift tax lifetime exemptions are both set at $5 million through the end of 2012 but scheduled to drop to $1 million in 2013.
If you’re interested in giving cash, stock or assets from your construction business to your children or other recipients but still want to stay in control of your company, there are certain strategies you can employ.
For instance, you might recapitalize your company’s stock into primarily nonvoting shares and place those shares in an intentionally defective grantor trust for the gift recipient. Meanwhile, you could retain voting rights by hanging on to the remaining voting shares. (This strategy is more complicated than these two sentences make it sound. But it is one example.)
Talk to your financial advisor about your gift planning options. And don’t delay: Smart moves now will let you take full advantage of these favorable tax rates before they’re gone.
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