When civil unions became legal for same-sex couples in New Jersey last year, the lesbian, gay, bisexual and transgender community celebrated a hard-won victory. But conflicting laws for LGBT partners at the state and federal levels have some business owners who live with same-sex partners worried about how the conflict may affect their estate planning.
Kimberlee Williams and Tamara Fleming-Cooper are co-owners of Newark-based marketing firm Femworks LLC and are both in civil unions. If both owners were to die and their respective partners were each to receive half the business, it would become “difficult on the federal level to transfer our assets to them without an estate tax being paid,” says Williams.
Femworks, which has five part-time employees besides the owners, specializes in reaching African Americans in the LGBT community.
Neither Williams nor Fleming-Cooper have children, but both want to have everything figured out before they do because their business makes up a large portion of their personal assets.
Each member of a civil union must file separate federal tax returns because federal law doesn’t recognize civil unions. Williams says there is a burden on small business owners because of the time spent on all the paperwork.
Stephen Hyland, a Westmont attorney who specializes in LGBT couples law, says that under federal law one member of a civil union who gives the other more than $12,000 in one year as a gift will eat into a $1 million lifetime gift-tax exclusion.
“Let’s say a business owner [in New Jersey] in a same-sex civil union and his partner buy a house and the business owner puts down the entire down payment,” he says. “Later in the same year, the business owner gives his partner a $50,000 stake in the company. The business owner would have given his partner a reportable gift of half the down payment plus the $50,000 investment minus the $12,000 annual gift exclusion.”
Hyland notes that the $1 million lifetime federal gift-tax exclusion counts toward the federal estate-tax exemption, a tax levied upon death that is currently capped at $2 million but scheduled to jump to $3.5 million next year.
“So if I used up $500,000 of my gift-tax exclusion, I’ve really reduced the amount of my estate I can leave tax-free to $1.5 million” under the current cap.
Meanwhile, members of a traditional marriage can gift each other unlimited amounts of money without being federally taxed, and can take federal-tax deductions on all assets left to each after death, says Hyland. But gay and lesbian couples don’t have that right, notes Hyland.
For state taxes such as the inheritance-transfer tax and the estate tax, same-sex partners in civil unions get the same exemptions as married couples, he says.
In New Jersey, an estate in excess of $675,000 is subject to the state’s estate tax, however civil-union couples and married couples pay no tax on assets they leave to their spouse. Same-sex couples in domestic partnerships are exempt from the state’s inheritance-transfer tax but not from the estate tax.
“What it comes down to is that anytime an [LBGT] business owner is doing something that would be non-taxable federally if he were married, it has tax implications either as a gift or income,” Hyland says. “Unfortunately, that’s the effect of the federal law.”
Stephanie Canas Hunnell, a lawyer in Belmar, says same-sex partners in civil unions should create what is called a dummy form with the state when filing their federal estate taxes because the federal government doesn’t recognize same-sex unions.
“One form is a real form filed with the federal government to pay taxes, as if the estate was being left to a stranger,” she adds.
“The other is a dummy form filled out as if the estate was being left to a spouse. You would use dummy form in New Jersey to get the same tax benefits as a married couple,” says Canas Hunnell.
“Because the federal government doesn’t recognize same-sex marriages or civil unions as having the same rights and responsibilities as opposite-sex married couples, they’re not going to give any [tax] benefits,” she says. “So you’re not any kind of relation according to the [federal] government and you’re going to pay a higher tax.”
Both Hunnell and Hyland advise LGBT business owners in New Jersey to assemble a team comprised of a lawyer, an accountant and a financial adviser who are familiar with the laws surrounding same-sex couples.
Showing posts with label NJBIZ magazine. Show all posts
Showing posts with label NJBIZ magazine. Show all posts
Wednesday, September 30, 2009
Wednesday, September 17, 2008
A Good Time To Review Estate Tax Plans: Decline in asset value prompts new strategies
The fallout from an unsteady economy that has toppled Wall Street titans also is shaking up New Jersey, with unemployment rising and fears that more upheaval is yet to come.
But the financial maelstrom may offer opportunities for business owners, according to some accountants and lawyers, who say the downturn in stocks, housing and other assets makes it a good time to review estate tax plans.
“Even if a company has not been directly impacted by Wall Street troubles, this may be a particularly good time for business owners to think about estate tax planning,” since certain tax strategies are pegged to interest rates, says Elizabeth E. Nam, a senior manager in the family office group of Rothstein Kass, an accounting firm with an office in Roseland.
One such planning vehicle is a grantor trust—a way to transfer business interests and other assets to next-generation heirs while minimizing estate tax liability.
“A low-interest-rate environment like this could open up some good opportunities to move a business from the senior generation to the next generation of owners,” Nam says.
In some cases, the value of real estate and other assets are now at depressed levels, so “giving them away now can mean that any later growth will be excluded from an individual’s estate, for tax purposes,” says Warren K. Racusin, a partner in the Morristown law office of McElroy, Deutsch, Mulvaney & Carpenter LLP. He is co-chair of the firm’s private client services group, and focuses on estate planning and other matters.
“This opportunity is perhaps the best since the early ‘90s, when we went through the savings and loan crisis,” he says. “Stocks, real estate and some business assets have taken a drubbing, so getting them out of an individual’s estate now may make sense.”
Scott Testa, a tax principal at the East Hanover office of Friedman LLP, an accounting firm, agrees.
“It’s a classic move,” he says. “When assets are depressed, you can generally gift more of an interest in them at a lower value, potentially reducing your taxable estate and your exposure to gift tax liability.”
One strategy involves transferring ownership rights in a closely held company without losing control of the business.
“A business may be able to create two classes of stock or interests, preferred interests—with fixed or stated priority as to dividends or distributions—and common interests that allow for future appreciation,” Testa says. “The current owner would retain the preferred interests, thus ‘freezing’ the value of his or her retained share of the business, while the common interests would be gifted to the owner’s children.” Those common interests would appreciate with the market’s recovery.
Another way to reduce the taxable value of an estate involves gifting cash, an interest in a business or other assets without running afoul of exemptions to gift taxes.
Generally, individuals can give away as much as $12,000 a year per recipient without having to pay a tax based on the value of the gift. On a cumulative basis, donors generally are subject to a $1 million lifetime exemption before they have to pay tax on the gifts.
“The key is to leverage these gifts using techniques that allow for discounts, or to take advantage of the currently low IRS valuation and interest rates,” Testa says. In
the case of marketable securities that have depreciated below the value paid, “it may be best to sell the shares first and then gift the cash.”
The timeline of the estate tax is another consideration, Testa says. It’s scheduled to be repealed in 2010, and reinstated in 2011.
“I’ve been counseling clients about strategies they can adopt,” Testa says. “But some of them are hesitant to take any action because of uncertainty surrounding the future of the estate tax.”
But the financial maelstrom may offer opportunities for business owners, according to some accountants and lawyers, who say the downturn in stocks, housing and other assets makes it a good time to review estate tax plans.
“Even if a company has not been directly impacted by Wall Street troubles, this may be a particularly good time for business owners to think about estate tax planning,” since certain tax strategies are pegged to interest rates, says Elizabeth E. Nam, a senior manager in the family office group of Rothstein Kass, an accounting firm with an office in Roseland.
One such planning vehicle is a grantor trust—a way to transfer business interests and other assets to next-generation heirs while minimizing estate tax liability.
“A low-interest-rate environment like this could open up some good opportunities to move a business from the senior generation to the next generation of owners,” Nam says.
In some cases, the value of real estate and other assets are now at depressed levels, so “giving them away now can mean that any later growth will be excluded from an individual’s estate, for tax purposes,” says Warren K. Racusin, a partner in the Morristown law office of McElroy, Deutsch, Mulvaney & Carpenter LLP. He is co-chair of the firm’s private client services group, and focuses on estate planning and other matters.
“This opportunity is perhaps the best since the early ‘90s, when we went through the savings and loan crisis,” he says. “Stocks, real estate and some business assets have taken a drubbing, so getting them out of an individual’s estate now may make sense.”
Scott Testa, a tax principal at the East Hanover office of Friedman LLP, an accounting firm, agrees.
“It’s a classic move,” he says. “When assets are depressed, you can generally gift more of an interest in them at a lower value, potentially reducing your taxable estate and your exposure to gift tax liability.”
One strategy involves transferring ownership rights in a closely held company without losing control of the business.
“A business may be able to create two classes of stock or interests, preferred interests—with fixed or stated priority as to dividends or distributions—and common interests that allow for future appreciation,” Testa says. “The current owner would retain the preferred interests, thus ‘freezing’ the value of his or her retained share of the business, while the common interests would be gifted to the owner’s children.” Those common interests would appreciate with the market’s recovery.
Another way to reduce the taxable value of an estate involves gifting cash, an interest in a business or other assets without running afoul of exemptions to gift taxes.
Generally, individuals can give away as much as $12,000 a year per recipient without having to pay a tax based on the value of the gift. On a cumulative basis, donors generally are subject to a $1 million lifetime exemption before they have to pay tax on the gifts.
“The key is to leverage these gifts using techniques that allow for discounts, or to take advantage of the currently low IRS valuation and interest rates,” Testa says. In
the case of marketable securities that have depreciated below the value paid, “it may be best to sell the shares first and then gift the cash.”
The timeline of the estate tax is another consideration, Testa says. It’s scheduled to be repealed in 2010, and reinstated in 2011.
“I’ve been counseling clients about strategies they can adopt,” Testa says. “But some of them are hesitant to take any action because of uncertainty surrounding the future of the estate tax.”
Tuesday, July 1, 2008
Businesses Owners Need To Plan for Their Exit: Companies should be prepared for the boss’s departure
By Scott Goldstein 6/2/2008 NJBIZ magazine
Owners of closely held companies—especially family businesses—have a lot on their minds, and it often doesn’t involve what happens if an owner or partner dies or leaves the company unexpectedly.
“To fail to plan is no plan. You are leaving things to chance,” says Parag P. Patel, a Woodbridge-based business and tax lawyer who helps companies create succession plans.
Experts say most small and mid-sized private companies don’t have succession plans—and that can lead to confusion and loss for the business.
The main questions for a succession plan are: Who will lead the company? Who will buy out the deceased partner? And in the case of a family business, will the successor come from within the company or from within the family?
“These are challenging questions. It’s better to have this conversation before a partner actually dies or pulls out, when the stakes and the emotions aren’t as high,” says Marguerite Mount, an accountant with The Mercadien Group in Princeton. “You can apply more intellect than emotion. That why it’s called succession planning.”
A succession plan addresses more than just death, she says. It can apply when a partner retires, gets divorced or becomes disabled.
“Do you have one partner sell to the others? Do you find another partner to sell to? Do you continue operating the business the same way? And who will take the leadership role?” Mount cites as questions that need to be explored.
And some of the answers help create a philosophy for the business as it currently exists, Mount says. Are you building the company to sell? To merge? Are you going to take the company public? Or will you let the company perpetuate in the same form?
When a partner is suddenly gone, the succession plan can designate whether the shares go to the departing shareholder’s estate or are sold to the surviving shareholders, says Patel.
“With a plan, you won’t have the remaining shareholders arguing and you won’t have an unexpected shareholder entering the business,” Patel says.
“Without a plan, you can have a bank become a shareholder in the case of a bankruptcy,” he adds. “And you can have a wife become a shareholder in the case of a divorce or death. There are many scenarios.”
Setting up a succession plan involves communication and time.
“First thing you need to do is set up a vision statement and if you can’t do that between yourselves, then you need to have that facilitated,” Mount says. “That can take the form of professional facilitators or you can use someone who has knowledge in your industry.”
When The Mercadien Group is hired as a facilitator, it sets up a meeting among company partners in a “retreat setting” for a day, Mount says. Then the firm follows up to implement the plan with a broker or an attorney if a legal document is created, says Mount.
“The idea is to have a game plan that covers the inevi-table but unexpected.”
A family business’ succession plan should include a “buy-sell agreement” that specifies terms of ownership am-ong partners and the value of their shar-es, Patel says. “Of course, the lower the specified sh-are price, the lower the estate- and gift-tax value of the shares,” Patel says. That “avoids valuation disputes with the IRS, which may otherwise value the business higher and seek more on taxes after it is sold.”
A way to reduce estate taxes is for a business owner to shift minority shares to family members before the owner retires, Patel says. The IRS taxes transfers of business shares among family at a lower rate than it does the inheritance of business shares, he notes.
© 2008 Journal Publications Inc. All information on this site are copyright of Journal Publications Inc. All images are the sole property of Journal Publications Inc. and no rights are granted for any use without the express written consent of Journal Publications Inc.
Owners of closely held companies—especially family businesses—have a lot on their minds, and it often doesn’t involve what happens if an owner or partner dies or leaves the company unexpectedly.
“To fail to plan is no plan. You are leaving things to chance,” says Parag P. Patel, a Woodbridge-based business and tax lawyer who helps companies create succession plans.
Experts say most small and mid-sized private companies don’t have succession plans—and that can lead to confusion and loss for the business.
The main questions for a succession plan are: Who will lead the company? Who will buy out the deceased partner? And in the case of a family business, will the successor come from within the company or from within the family?
“These are challenging questions. It’s better to have this conversation before a partner actually dies or pulls out, when the stakes and the emotions aren’t as high,” says Marguerite Mount, an accountant with The Mercadien Group in Princeton. “You can apply more intellect than emotion. That why it’s called succession planning.”
A succession plan addresses more than just death, she says. It can apply when a partner retires, gets divorced or becomes disabled.
“Do you have one partner sell to the others? Do you find another partner to sell to? Do you continue operating the business the same way? And who will take the leadership role?” Mount cites as questions that need to be explored.
And some of the answers help create a philosophy for the business as it currently exists, Mount says. Are you building the company to sell? To merge? Are you going to take the company public? Or will you let the company perpetuate in the same form?
When a partner is suddenly gone, the succession plan can designate whether the shares go to the departing shareholder’s estate or are sold to the surviving shareholders, says Patel.
“With a plan, you won’t have the remaining shareholders arguing and you won’t have an unexpected shareholder entering the business,” Patel says.
“Without a plan, you can have a bank become a shareholder in the case of a bankruptcy,” he adds. “And you can have a wife become a shareholder in the case of a divorce or death. There are many scenarios.”
Setting up a succession plan involves communication and time.
“First thing you need to do is set up a vision statement and if you can’t do that between yourselves, then you need to have that facilitated,” Mount says. “That can take the form of professional facilitators or you can use someone who has knowledge in your industry.”
When The Mercadien Group is hired as a facilitator, it sets up a meeting among company partners in a “retreat setting” for a day, Mount says. Then the firm follows up to implement the plan with a broker or an attorney if a legal document is created, says Mount.
“The idea is to have a game plan that covers the inevi-table but unexpected.”
A family business’ succession plan should include a “buy-sell agreement” that specifies terms of ownership am-ong partners and the value of their shar-es, Patel says. “Of course, the lower the specified sh-are price, the lower the estate- and gift-tax value of the shares,” Patel says. That “avoids valuation disputes with the IRS, which may otherwise value the business higher and seek more on taxes after it is sold.”
A way to reduce estate taxes is for a business owner to shift minority shares to family members before the owner retires, Patel says. The IRS taxes transfers of business shares among family at a lower rate than it does the inheritance of business shares, he notes.
© 2008 Journal Publications Inc. All information on this site are copyright of Journal Publications Inc. All images are the sole property of Journal Publications Inc. and no rights are granted for any use without the express written consent of Journal Publications Inc.
Sunday, September 30, 2007
Will the Estate Tax Be Resurrected?
When the unknowable meets the possibly very expensive, it pays to plan ahead
A BURGEONING FEDERAL budget deficit may force the early expiration of a tax law that has cheered business owners for years. But experts say early planning may blunt the pain.
A provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 calls for the repeal of the federal estate tax as of Dec. 31, 2009, says Christine Pronek, a manager in the Estate and Trust Group in the Bridgewater office of Amper, Politziner & Mattia. The levy which opponents deride as the "death tax," is scheduled to be resurrected as of Jan. 1, 2011.
However, "the pressure to trim the federal budget deficit means that Congress is likely to revise the law to keep the tax in force through 2010 and beyond," Pronek says.
The estate tax is an assessment based on the value of assets owned by individuals at the time of their death. While $2 million of each individual's net taxable estate is generally exempt from the tax, the remainder is subject to a 47 percent federal tax rate. New Jersey generally exempts up to $675,000, and taxes the rest at up to 16 percent.
Pronek warns her clients, who include the owners of small and medium-sized businesses, not to bank on the planned 2010 repeal of the federal estate tax. For one thing, if it does happen, the repeal will only be in effect for the year 2010.
"The uncertainty of the federal estate tax system shouldn't stop a person from engaging in estate planning as a way to minimize their tax liability" she says. "All estate plans must be tailored to the respective individual's needs, but one frequently used approach is to include qualified disclaimer provisions in a will."
Pronek says qualified disclaimers provide flexibility for the surviving spouse to decide how much of the federal estate tax exemption should be held in a trust-commonly referred to as a credit shelter trust-and protected from being taxed as part of the surviving spouse's estate when he or she passes away
"This flexibility is key to New Jersey residents since the state of New Jersey has an exemption amount of only $675,000/' Pronek says. "With the disclaimer language in the will, the surviving spouse can decide if he or she wants to pay some state estate tax upfiont on the decedent spouse's estate, instead of taking a larger state estate tax hit on the surviving spouse's estate when that person passes.
"Regardless of the future of the estate tax," Pronek adds, "there's one piece of advice that won't change: Meet with your tax or other adviser early so you can plan effectively and be well prepared for the unknown."
A BURGEONING FEDERAL budget deficit may force the early expiration of a tax law that has cheered business owners for years. But experts say early planning may blunt the pain.
A provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 calls for the repeal of the federal estate tax as of Dec. 31, 2009, says Christine Pronek, a manager in the Estate and Trust Group in the Bridgewater office of Amper, Politziner & Mattia. The levy which opponents deride as the "death tax," is scheduled to be resurrected as of Jan. 1, 2011.
However, "the pressure to trim the federal budget deficit means that Congress is likely to revise the law to keep the tax in force through 2010 and beyond," Pronek says.
The estate tax is an assessment based on the value of assets owned by individuals at the time of their death. While $2 million of each individual's net taxable estate is generally exempt from the tax, the remainder is subject to a 47 percent federal tax rate. New Jersey generally exempts up to $675,000, and taxes the rest at up to 16 percent.
Pronek warns her clients, who include the owners of small and medium-sized businesses, not to bank on the planned 2010 repeal of the federal estate tax. For one thing, if it does happen, the repeal will only be in effect for the year 2010.
"The uncertainty of the federal estate tax system shouldn't stop a person from engaging in estate planning as a way to minimize their tax liability" she says. "All estate plans must be tailored to the respective individual's needs, but one frequently used approach is to include qualified disclaimer provisions in a will."
Pronek says qualified disclaimers provide flexibility for the surviving spouse to decide how much of the federal estate tax exemption should be held in a trust-commonly referred to as a credit shelter trust-and protected from being taxed as part of the surviving spouse's estate when he or she passes away
"This flexibility is key to New Jersey residents since the state of New Jersey has an exemption amount of only $675,000/' Pronek says. "With the disclaimer language in the will, the surviving spouse can decide if he or she wants to pay some state estate tax upfiont on the decedent spouse's estate, instead of taking a larger state estate tax hit on the surviving spouse's estate when that person passes.
"Regardless of the future of the estate tax," Pronek adds, "there's one piece of advice that won't change: Meet with your tax or other adviser early so you can plan effectively and be well prepared for the unknown."
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