Estate Planning
Friday | 03 June, 2011 | 3:03 am

Death and taxes

By David Berek

May 2011 - Many business owners are looking at estate planning with great interest. Congress failed to "repeal the repeal" in 2010, and some estates of business owners who died last year reportedly owe zero or little estate tax. People may be concerned they missed out on a significant tax loophole in 2010, but planning opportunities still exist for at least the next two years.

To understand the opportunities, it is important to review the transfer tax thresholds. The bar chart depicts the estate tax exclusion amount, which is the amount of property a decedent can pass to heirs before subjecting the estate to tax. From 2001 to 2002, the exclusion jumped from $675,000 to $1 million and increased to $3.5 million by 2009. In 2010, there was no estate tax.

For 2011 and 2012, Congress increased the exclusion to $5 million, the highest ever. However, unless Congress extends the $5 million exclusion or imposes a new exclusion, the current law will end in 2013 and estates larger than $1 million will be subject to tax.

As the exclusion increased, the estate tax rate (the rate excess wealth is subject to) gradually decreased. However, if the current law expires at the end of 2012, the 2013 exclusion will be reduced to $1 million. Any excess more than $1 million will be subject to estate tax at 55 percent - a stiff increase from current levels.

Despite the unknown factors, fundamental planning techniques exist in the short term to ensure no one misses out on gifts and sales opportunities.

A lifetime gift in 2011 or 2012 would be beneficial because of the increased gift tax exclusion amount. A gift up to $5 million could pass gift-tax-free for the next two years. The gift tax exclusion is unified with the estate tax exclusion, and the amount is cumulative. If an individual gifted $3 million in 2011 and died in 2012, the most he or she could shelter on death would be the remaining $2 million.

Another option is a sale of assets in exchange for a note to freeze the value and transfer appreciation. If property sold today doubled during the term of the note, the excess appreciation would be transferred gift-tax-free. The transferor would receive the note repayment equal to the original amount sold, and the recipient would receive the excess appreciation.

Sale transactions
An alternative to outright gifting is a sale transaction strategy that can be gifted in the future to keep planning options open.

The individual transfers an asset to an entity for descendants. If the person transferred $3 million dollars worth of business interest, he or she would receive in return a note for $3 million and a stated usage factor, currently approximately 2 1/2 percent. If the property appreciates more than 2 1/2 percent, the excess appreciation stays in the entity for descendants.

Two favorable planning options result from the transaction:

  • If Congress does not act by 2013 to extend the higher gift tax exclusion of $5 million and if an individual wants to take advantage of the higher gift tax exclusion in 2012, he or she will be in a position to forgive the note by December 2012. The option gifts the balance of the note to descendants.
  • If Congress extends the law, one could continue the freeze transaction, which freezes the initial value of $3 million (plus the nominal 2 1/2 percent usage factor) to an individual’s net worth and transfers the appreciation tax free.
  • This works well when the underlying asset is sold during the note’s term. The value previously transferred to descendants is frozen in the amount of the note ($3 million plus interest). The underlying business interest and resulting value increase is transferred to the descendants on a tax-free basis.

    For example, if the transferred $3 million business interest was later sold for $5 million to a third party, the descendants’ entity would receive $5 million, pay the $3 million note and the descendants would accrue $2 million gift-tax-free. An attorney and accountant will have more information on this transaction, commonly referred to as a sale to a defective grantor trust. MM

    David Berek is an advanced planning and family office partner with Handler Thayer LLP. Thomas Tyndorf, director in Private Banking USA at Credit Suisse, along with Vince Pappalardo, managing director, and John Ebe, director, at Stout Risius Ross, will be contributing to the upcoming columns. For more information, contact Tom at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit

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