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Understanding Gift and Estate Tax Laws as Part of Business Succession


As part four in our series on business succession, it is important for the business owner to have a good understanding of the estate and gift tax, commonly known as the “Death Tax”, but officially called the Unified Transfer Tax.  We all know that when money or value is passed from one generation to the next or one party to the next, tax consequences can occur.  For instance, if a father gives a gift of $200,000 to his son to buy a home, there is a tax consequence for this money changing hands. The same is true if a business owner transfers a business to a son or daughter.  However, in each scenario, the tax consequence may not be seen for many years to come, if ever (read below).  In the recent decade, the threat of gift and estate taxes has been alleviated to some extent by automatic inflation indexing and changes in the laws which give rise to estate and gift taxes.

Tax Credit (currently $5,000,000 per person)

The Tax Credit is one part of what is called the “Unified Credit”, because, the taxable lifetime gift exemption and the estate tax exemption is actually 1 (one) credit exemption, totaling

$5,000,000.  This was not true for nearly a decade, but is now back with us.

Because of multiple changes in the tax laws over the past decade, the estate tax exemption has increased dramatically.  In 2002 and 2003, the estate tax exemption was $1,000,000.  In 2004 and 2005, the estate tax exemption was $1,500,000.  On January 1, 2006 the estate tax exemption was $2,000,000 and remained at that level until December 31, 2008.   Then in 2009, the estate tax exemption was $3,500,000 per person.  In 2010, it was unlimited, but slated to go back to $1,000,000 in 2011.  Because Congress acted in time, the current exemption is $5,000,000 for 2011 and 2012.  To further alter the law, the concept of portability was introduced, which allows married couples to use unused portions of their deceased spouse’s exemption in order to somewhat simplify estate planning.  Additionally however, states have enacted their own estate tax exemption amounts and they vary by state, making the state level

another concern for those in business. It is important to know your state exemption and not just plan for the federal exemption.

The Increasing Annual Gift Tax Exclusion (currently $13,000 annually)

A taxable gift is the amount that the value of the gift exceeds the annual exclusion amount year by year.  Taxable gifts are subject to $5,000,000 in lifetime exemptions.  This means that if a person gives taxable gifts in a lifetime of over $5,000,000, that person will be required to begin paying taxes on such gifts.  It is important to point out that since the $5,000,000 taxable gift exemption is simultaneously the estate tax exemption; a taxable gift amount simultaneously reduces the estate tax exemption dollar for dollar.  To illustrate the change the annual gift tax exclusion has endured: in 2004 and 2005, the annual gift tax exclusion was $11,000.  In 2006, the annual exclusion for the gift tax was increased to $12,000.  This amount lasted until December 31, 2008.  Since 2009, the exclusion was raised to 13,0000.  The benefit of this is that now business owners can give away more value to a descendant than in past and not be subject to any taxes.

The Lifetime Gift Tax Exemption

Again, it is important to point out that the Lifetime Gift Tax Exemption and Estate Tax.

Exemption are one credit totaling $5,000,000 (not $10,000,000).  As mentioned above, “Taxable gifts are subject to $5,000,000 in lifetime exemptions.” This means that if you gave a gift to anyone exceeding $13,000 in any one year, the gift would trigger the need for the donor to file a gift tax return and reduce his or her lifetime gift exemption by the amount over the gift. This does not mean the person giving the gift should not file a tax return if the gift is under $13,000.  In such situations of gifting stock in closely-held companies or gifts of real estate it is cheap and beneficial to file a gift tax return, thus starting the statute of limitations and setting the value.  The donor of the gift is generally the responsible party required to file and pay the gift taxes if any are due.  There are only a small number of situations where the donee is responsible for the taxes.


There are two points expressed herein that are important to business succession planning: 1) Estate and gift taxes have the potential to affect 5% of all estates in the U.S.  With proper planning this 5% can be decreased to 2% of all estates.  2)  The laws and are constantly in a state of flux.  This is critical knowledge if you own a business and / or are involved in the ownership of real estate.  Contact the professionals at The Center if you have any questions regarding estate and gift tax planning.

By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors