Newly Enacted Tax Legislation Provides Unprecedented Wealth Transfer Opportunities for Family Owned Businesses
The December 2010 tax relief legislation (P.L. 111-312) contains several provisions which facilitate the tax-efficient transfer of family businesses to future generations.
Family business owners can experience tax benefits by transferring business ownership to future generations. Taxable income not needed by a founder is shifted to the next generation. Perhaps more importantly, if the family business is growing in value, it is desirable to have that growth in value occur in future generations of ownership rather than in the estates of the senior generation of ownership.
Until now, federal tax law has provided for a $1 million lifetime gift tax exemption (over and above the $13,000 per donee annual exclusion amount). This has meant that a husband and wife could each make lifetime gifts of their family business interests of up to $1 million ($2 million in the aggregate) without incurring gift tax. Gifts over and above the $1 million level ($2 million in the aggregate for spouses) were subject to gift tax of 35% and up. Oftentimes in the context of a growing business, it was still tax-efficient to make gifts beyond the $1 million exemption and pay the gift tax because this would avoid payment of estate tax of a much larger asset resulting from growth in value of the business over time, possibly at an even higher estate tax rate.
Under the new law, which is in effect for the next two years, the lifetime gift tax exclusion is increased to $5 million per person. This means that husband and wife in a family-owned business can now transfer $10 million in wealth to their children free of gift tax over and above the $13,000 annual exclusion amount.
The new legislation also allows a surviving spouse to use any unused estate tax exemption amounts that his or her spouse left at death after 2010. The amount per spouse is $5 million. This concept is referred to as portability of the unused gift tax exemption. For example, if each spouse has used $2 million of their respective gift tax exemption and one spouse dies, the surviving spouse’s gift tax exemption would be $6 million ($3 million remaining of the surviving spouse plus the remaining $3 million of the deceased spouse). In order to qualify for the portability an estate tax return must be filed at the death of the first spouse even if no estate tax would be due.