Table 1. Estate and Gift Tax Rates and Exemption Amounts, 1975-2011 Year


Annual Gift Exclusion


1975-76 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986


1987-97 1998 1999


2000-01 2002 2003 2004 2005 2006


2007-08 2009 2010 2011


$3,000 $3,000 $3,000 $3,000 $3,000


$10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $11,000 $11,000 $11,000 $11,000 $12,000 $12,000 $13,000 $13,000 $13,000


Exemption Value of Unified Credit


$60,000 $120,667 $134,000 $147,333 $161,563 $175,625 $225,000 $275,000 $325,000 $400,000 $500,000 $600,000 $625,000 $650,000 $657,000 $1 million $1 million


$1.5 million $1.5 million $2 million $2 million


$3.5 million $5 million $5 million


More than 75% of U.S. metalcast- ing businesses are small businesses with fewer than 100 employees, and a significant percentage of those busi- nesses are family-owned. To foster a smooth transition of the foundry or diecasting facility to the next genera- tion, the succession plan must take into account the taxpayers’ net worth, liquidity needs, tax implications, per- spectives on family capabilities and long-term goals for the business. Many business owners become frus-


trated with succession planning because tax laws change so frequently. However, the estate and gift tax laws can be used to a business owner’s advantage if the owner capitalizes on the opportunity in 2012. According to most advisors, the current opportunity to make large, lifetime gifts through the end of 2012 may never again be available. High gift tax exemptions, coupled with the low business valuations of the metalcasting industry, mean this year presents unique opportunities for owners. To illustrate how a few real metal-


casting businesses have approached suc- cession planning, consider the following strategies. (Te names of the companies have been withheld.)


30 | MODERN CASTING June 2012


Threshold of Highest Statutory Tax Rate


$10 million $5 million $5 million $5 million $5 million $5 million $4 million


$3.5 million $3 million $3 million $3 million $3 million $3 million $3 million $3 million


$2.5 million $2 million $2 million $2 million $2 million


$1.5 million $1.5 million $500,000 $500,000


Highest Statutory Tax Rate (%)


57.75 gift; 77 estate 70 70 70 70 70 65 60 55 55 55 55 55 55 55 50 49 48 47 46 45 45 35 35


SUCCESSION STUDIES


Family Business With Generation Planning


ABC Co. was established by a couple that had emigrated from Europe more than 50 years ago. Te business expanded and became increasingly profitable. Te couple had two children, both of whom were involved in the business from an early age. Te son went away to college and upon graduation, chose to work in the business. Te daughter also went to college but chose to pursue a separate career. Trough the years, the couple had many meetings with their son, daughter and advisors regarding the future ownership of their metalcasting business. At the meetings, the parents communicated their long-term goals for the family business (based on their own definition of success) and eventu- ally developed a succession plan based on those goals. Teir goal was not to build the most profitable company possible and sell it. Instead, they wanted to build a business that would continue making castings for genera- tions to come. To accomplish this goal, the son eventually received gifts of


stock. He was also named as an officer of the company and worked alongside his parents in making day-to-day business decisions. It was important to the parents their son learn the business and develop a vested interest in its continued success. Te daughter received gifts of non-


voting stock to allow her to receive income from the business without having control. Te value of the son’s gifts of stock were larger than the daughter’s gifts of stock, so in order to maintain fairness (a concept equally as important to Mom and Dad as their long-term goals), the daughter also received gifts of interest in the entity owning the metalcasting facility’s build- ing. Tese plans were implemented via tax favorable techniques. For example, the daughter received her interest in the entity owning the building via a grantor-retained annuity trust. Tis plan was a result of several meetings in which the owners determined their future goals for the business, as well as their liquidity needs for the future. Te owners realized a successful succes- sion plan requires communication and evolves over time, so it must be consid- ered and addressed consistently.


Planning for Future Buyout DEF Metalcasting Corp. was


founded by two brothers, each equally involved in the business. Each brother eventually wanted to transfer his stock in the corporation to his children. Te brothers wanted the children to take over the business, but neither brother wanted to give up his respective income stream from the corporation, nor his control over busi- ness operations. Te brothers used a technique to create a preferential interest for themselves in which the children obtained an interest in the future growth of the corporation, but the brothers retained a defined prefer-


ONLINE RESOURCE


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