ESOPs as a Plan to Help Business Owners Avoid "Taxmageddon"

Jerry L. Ripperger & Brian D. Hector: ESOPs: a plan to help business owners avoid "taxmageddon":

The potential massive tax increases looming in 2013 will be felt by many taxpayers, but they could take an especially hard toll on business owner clients who have plans to sell.  With nearly 80 percent of their net worth tied up in the value of the enterprise¹, such business owners could lose a significant amount of assets which they have spent a lifetime amassing.

On the horizon

If Congress allows the Bush-era tax cuts to expire in 2013, long-term capital gains rates will increase to 20 from 15 percent.  On top of that, the health care reform act will impose a new 3.8 percent tax on capital gains for certain individuals in 2013, bringing the capital gains tax to 23.8 percent.  The jump to 23.8 from 15 percent is a 60 percent increase.

Higher income taxpayers will also experience a reduced benefit from itemized deductions if these tax cuts expire. The net effect could boost their capital gains tax rate to 25 percent from 23.8 percent.  Further, Congress and President Obama are discussing reducing deductions in other ways.

Then there are state taxes. Some, like California or New York, already have high capital gains tax rates, some as much as 8-10 percent, which high income taxpayers would pay in addition to the increased Federal rates.   Consequently, for the business owner who sells his or her business in 2013 as part of a succession plan, the collective tax increases could wipe out as much as 30 to 35 percent of the wealth the owner worked for decades to build up in the business and accumulate for retirement regardless of whether the owner’s stock is redeemed or sold to a third party.

Enter the ESOP Advantage

There is a way to help business owner clients soften (and in some instances completely eliminate) the impending tax blow and unlock substantial assets by using an employee stock ownership plan. Because of their special tax features, ESOPs allow owners to sell their stock and diversify their wealth on a tax-favorable basis, while effectively retaining control of their business.

See full article by Jerry L. Ripperger & Brian D. Hector at ESOPs: A Plan to Help Business Owners Avoid "Taxmageddon", LifeHealthPro, Dec. 10, 2012.

Arkansas Intestate Estate Calculator

Kurt R. Nilson has taken the guesswork out of determining how property will be distributed for those Arkansas residents who do not have a will (also known as passing by intestacy).  His online calculator, which can be found on his website, MyStateWill.com, automatically determines to whom such property will be distributed and calculates the dollar amount given to each such heir.  This tool streamlines the complicated Arkansas intestacy laws, which are some of the most complex of any state.

You can find his Arkansas Intestacy Calculator here.

From his website:

Dying Intestate

Do you really know what happens to your property if you die without a will? (Click here and choose your state for the quick answer) Do you know what happens to a person's debt when they pass away? Learn more bankruptcy information at totalbankruptcy.com.  Some common misconceptions about what happens to your property when you die without a will, or "intestate", include having all of your property being given to charity or to the state.

Another common misconception, with more serious consequences, is the belief that a surviving spouse is always granted all or substantially all of the deceased spouse's intestate estate. (Much about the probate process is also misunderstood.)

Post Presidential Election, Tax Professionals Predict Expiration of Lifetime Gift & Estate Tax Exemption

Now that the dust has settled following the 2012 presidential election, some tax experts are predicting that President Barack Obama's administration and the new Congress may let the current lifetime gift and estate tax exemption expire.  In his article, Grab the $5M Gift and Estate Tax Perk: It's Gone in 2013, Robert W. Wood discusses this important issue:

It’s post-election, nearly year-end, and taxes are on everyone’s mind. You may not be able to do much about the fiscal cliff or other imponderables. But you can fix your will and trust or just make a gift by year-end.

Act now! Think infomercial. This is a special limited time offer! Procrastination is understandable, especially about taxes and mortality. Yet it’s still surprising most people haven’t taken advantage of the incredibly favorable estate and gift tax law expiring in 2012. See It Pays To Plan For Future Estate Tax Changes. 

Congress enacted a $5 million exemption for both gift and estate taxes, but only through 2012. See Making Tax Decisions In Limbo. But wait, there’s more! Indexed for inflation, the exemption is now $5,120,000. It drops to only $1 million January 1, 2013. That’s a free pass to give away up to $5,120,000 without tax. If you are married, that’s up to $10,240,000 for a married couple with no tax.

Former IRS Commissioner Doug Shulman Gives Prepared Remarks Before the AICPA, Washington, DC

On November 7, 2012, Douglas H. Shulman, Commissioner of the Internal Revenue Service from March 24, 2008 through this past Sunday, November 11, 2012, in prepared remarks before the American Institute of Certified Public Accountants (AICPA) in Washington, DC, closed out his long tenure as IRS Commissioner with the following statement covering subjects including tax evasion, IRS efficiency, taxpayer improvements, corporate taxes, IRS technology, and more:

Side note:  In an interview with C-SPAN in January 2010, Commissioner Shulman stated, "I use a preparer... I've used one for years. I find it convenient. I find the tax code complex, so I use a preparer.”

IR-2012-89, Nov. 7, 2012

WASHINGTON — Today is the day after the elections and of course, political Washington is all abuzz…bloggers are blogging…commentators are commenting… folks on Twitter are tweeting… the pundits are dissecting last night’s results.

However, I am not here to wade into those political waters. Rather, I come before you today to talk about something entirely different.

In a few days time – November 11th to be precise – my term as the 47th Commissioner of the Internal Revenue Service officially comes to a close. And looking back, I can say it has been a true honor and one that I wouldn’t trade for anything.

I suppose it’s quite natural when one has completed a significant task like running the IRS for almost five years to pause ... to reflect on the journey taken … to mark the milestones met … and to ponder the lessons learned.

Standing before you today…standing on the shoulders of those who came before me…building on their work and achievements…it is gratifying to share with you the meaningful…and I believe, lasting progress that has been made to our nation’s tax system.

IRS Releases 2011 Tax Stats - Estate Tax and Gift Tax Statistics

The IRS Statistics of Income Program (SOI) has posted "SOI Tax Stats - Estate Tax Statistics" and "Gift Tax Statistics," with data from 2011.  The update includes three estate tax statistics spreadsheets showing data from filing year 2011 for estate tax returns (Form 706).  One spreadsheet shows income, deduction, and tax computation data, classified by taxability of estate tax return and size of estate.  A second spreadsheet shows selected estate tax computation data classified by State of residence.  A third spreadsheet shows data regarding charitable bequests classified by state of residence.  Below is an excerpt from the first spreadsheet showing estate tax revenue classified by taxability of estate tax return and size of estate.

Table 1. Estate Tax Returns Filed in 2011, by Tax Status and Size of Gross Estate [Money amounts are in thousands of dollars.] Tax status and size of gross estate	Gross estate for tax purposes
	Number	Money Amount   (in thousands)
All Returns	4,588	48,009,811
Under $3.5 million	601	1,427,959
$3.5 million < $5.0 million	990	4,129,975
$5.0 million < $10.0 million	2,110	13,874,974
$10.0 million < $20.0 million	563	7,531,234
$20.0 million or more	324	21,045,670
All Taxable Returns	1,480	19,832,684
Under $3.5 million	174	428,126
$3.5 million < $5.0 million	278	1,181,171
$5.0 million < $10.0 million	654	4,443,130
$10.0 million < $20.0 million	218	2,967,290
$20.0 million or more	156	10,812,968
All Nontaxable Returns	3,108	28,177,127
Under $3.5 million	427	999,833
$3.5 million < $5.0 million	712	2,948,804
$5.0 million < $10.0 million	1,456	9,431,844
$10.0 million < $20.0 million	345	4,563,945
$20.0 million or more	168	10,232,702

...

Permanent Change on the Way for the Estate Tax?

Jeffrey A. Cooper of Quinnipiac University School of Law makes the case in his recently published paper, Time for Permanent Estate Tax Reform:

 

In the next four years, preferably in the next four months, Congress and the President must work together to implement their own vision for the estate tax, rather than allowing mere inertia to effectuate choices made by their predecessors. Put simply, the Congress of 2013 must enact permanent estate tax reform.

Unfortunately, that task will not be so simple. In many ways, the challenge facing estate tax reform is but one narrow slice of a far larger problem confronting modern tax policy. In much of the recent past, Congressional action on tax legislation has been dictated by short-term considerations rather than long-term policy goals. Through skillful legislative drafting and genuine compromise, the President and the Congress of 2013 can reverse this trend. I offer this essay as a modest contribution to that effort.

Waldon: The Fiscal Cliff: Recession Looms Without Compromise, Leaders in Arkansas Fear

George Waldon of Arkansas Business warns of upcoming tax crisis in his article, The Fiscal Cliff: Recession Looms Without Compromise, Leaders in Arkansas Fear:

If Congress fails to address the so-called fiscal cliff, the United States faces another recession, leaving Arkansas political and business leaders to hope the critical hour of decision will force the appearance of bipartisanship.

The fiscal cliff remains an icon of the hour: a metaphorical escarpment built on a mountain of national debt that stands at $16 trillion and growing.

Threatening to send the economy tumbling over the edge in 2013 is a convergence of possible tax increases and automatic spending cuts intended to reduce the federal government's budget deficit.