Entrepreneurs consistently face the difficulty of passing the
family business to younger generations. Among the many challenges
to successful transitions is the cost of estate, gift and
generation-skipping taxes (GST) payable on transfers to family
members. As challenging as today's transfer tax environment is,
scheduled changes in legislation will make inter-generational
transfers even more difficult.
Given these impending legislative changes, 2012 presents a
potential limited window for individuals to accomplish significant
succession planning. Because this planning requires time to
consider and implement, it is critical that you begin the process
now and consummate the plan before year-end. The reasons for this
The individual gift, estate and GST exemptions are $5.12
million ($10.24 million in aggregate for a married couple), and are
scheduled to decrease to $1 million on January 1, 2013. (The GST
exemption will be somewhat higher due to inflation indexing.)
The top gift, estate and GST tax rate is 35%, scheduled to
increase to 55% on January 1, 2013.
The August 2012 AFRs (interest rates applicable to inter-family
loans and sales) are at historic lows: 0.25% short term; 0.88%
midterm; and 2.23% long term.
Valuations, upon which wealth transfer planning are based, are
below their peak levels. For example, business valuations, while
somewhat recovered from 2008-2009 levels, are still considered by
many to be relatively low. Similarly, real estate valuations for
virtually all commercial property types remain below 2007 peaks.
Volatility, risk and uncertainty continue to increase minority
interest discounts for lack of control and lack of marketability.
As an aside, using high quality appraisers continues to be
important in valuing property to be transferred. For example, the
Tax Court recently recognized the stature of MAIs (Members of
the Appraisal Institute) for real estate valuation.
Valuation discounts for closely-held businesses and other
entities, which have been the subject of numerous legislative
proposals that would limit their availability, can still be used to
leverage transfers under the current exemptions.
For anyone who has used $1 million of their lifetime gift tax
exemption, the overall effect is that gifts or other transfers made
in 2012 in the incremental amount of $4.12 million ($8.24 million
for married couples) can be made completely tax free; whereas, the
same transfer made in 2013 will incur an immediate tax of $2.111
million ($4.222 million for married couples). Using additional
planning techniques can dramatically increase these savings by
removing additional amounts from the estate tax
*Assumes $1 million gift exemption(s) previously
Predicting the course of future tax legislation is impossible,
but the unfavorable law changes in 2013 noted above will occur
automatically unless Congress acts. Regardless of potential
legislative developments, it is unlikely that the tax laws and
economic factors noted above will be more favorable in the
foreseeable future than what they are today.
The balance of 2012 offers a unique opportunity to substantially
reduce the estate tax cost of transferring closely-held businesses
and other assets. Because wealth transfer impacts family dynamics
and other aspects of your succession arrangements, it will require
time to thoughtfully plan for this 2012 opportunity. Therefore, we
urge you to consult with your tax advisors as soon as possible.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Recent changes in Cypriot legislation have not had a significant impact on the international status of Cyprus as a reputable financial centre which offers one of the most attractive tax regimes in Europe and an extensive network of double tax treaties.
In accordance with its agreement with international lenders, Cyprus has made a number of changes to its tax rates.
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