[caption id="attachment_46928" align="alignright" width="288" caption="Jay Silverstein, Steven Goldberg, Ronald Emanuel"][/caption]
NORTH BAY – While experts agree that estate planning is a comprehensive process spanning many facets of an individual’s financial legacy, one element of that planning has dominated the limelight since 2011: A temporary five-fold increase in the value of assets that an individual can gift without a federal tax penalty.
That window, which allows an individual to pass on $5 million in assets tax-free and a couple to pass on twice that amount, is set to close at the end of 2012. Estate experts in the North Bay said they expect a surge in estate planning and demand for appraisers as individuals hurry to take advantage of the exemption.
Many of those professionals are already working with clients to develop estate plans that utilize the exemption. For those who are interested but haven’t started planning, those experts advise: the earlier, the better.
“Somebody who waits until the last minute might not have things finished by the end of the year,” said Jay Silverstein, wealth services partner at the Santa Rosa office of the accounting firm Moss Adams. “There is a great opportunity now, and the more time someone has to give a thoughtful approach to using it, the better off they’ll be.”
Congress approved the current two-year estate tax exemption in Dec. 2010, an increase from the $3.5 million exemption that was in place in 2009. Additionally, any value exceeding the increased $5 million exemption would be taxed 10 percent lower, at 35 percent.
The provision also enhanced options for planning, as the gift, generation-skipping and estate taxes were wrapped into a single combined exemption. It allowed individuals to essentially take advantage of the favorable estate exemption now, rather than being subject to an unknown future rate at the time of death.
The favorable provision came with compromise, however. Barring any subsequent legislation, the rate will drop to a $1 million exemption for individuals in 2013, and estate assets exceeding that amount will be taxed at 55 percent. Several local experts said that there was little chance that a revenue-hungry Congress would vote to change those plans during an election year.
With the sunset of the exemption looming, Steven Goldberg, partner at the Santa Rosa-based law firm Friedemann Goldberg, said that he expected a significant increase in highly valued gifts this year. He warned that the demand on appraisers and other professionals could create a worsening gridlock as the year went on, and he advised individuals to start planning early.
“The bottom line is – 2012 is probably a very good year for clients to make a significant gift, if they want to make a gift like that,” he said.
Mr. Goldberg said that the proliferation of closely held small businesses in the North Bay meant that many are already looking to pass their business assets to a successor and could stand to benefit from the exemption.
One example was the area’s vineyards and wineries, which are often family-owned businesses that have grown in value over several generations, Mr. Goldberg said. Those owners are among those who could find themselves “asset rich” from the business asset itself and relatively “cash poor” from revenue, unable to afford the taxes that come with passing on the family business.
The current estate window could be a valuable tool for those individuals, further enhanced by the fact that valuations are at historic low and that future appreciation of the business’ value would be excluded from the gift for tax purposes, said Wayne Dziedzic, an attorney focusing on estate planning at the Santa Rosa Law Firm Carle Mackie Power & Ross.
“If anybody is in an estate tax situation, now is a good time to gift those assets,” he said.
Even for those who have assets that fall short of the $10 million exemption, Mr. Goldberg said that the remaining amount could create a protective buffer against the possibility that a future audit by the Internal Revenue Service would find the estate to be a higher value.
He added that the chance of an IRS audit was probably diminished for many in 2012, with the sheer volume of expected gifts likely forcing the agency to focus its resources on the biggest cases.
Despite the expected stalling of Congress, advisers said that new tax measures were still entirely possible. Ronald Emanuel, tax manager at Pisenti & Brinker, noted several changes under consideration, including the tweaks possible from the so-called Sensible Estate Tax Act announced in the Democratic ways and means committee in November.
Those changes would include a $1 million exemption indexed to inflation starting in the year 2000, a 55 percent top estate and gift tax rate and the elimination of tax protection afforded by the generation-skipping tax after 90 years, Mr. Emanuel said.
Passing on a significant estate all at once can have consequences, including the ramifications of handing millions over to young heirs who lack the maturity to manage their inheritance. Individuals in a position to make large gifts now can use vehicles like trusts to manage the estate, but a comprehensive plan should take time to consider issues like personal cash flow needs and ownership transition, Mr. Silverstein said.
“Now is a great time to act, but it needs to be done in a way that’s thoughtful, so that an individual is not doing something simply for tax reasons,” he said.
