ence amount. Tis system allowed the brothers to receive an income stream from the business while at the same time allowing each son or daughter an interest both financially and from a business standpoint. Control over the corporation remained with the brothers, but the next generation became involved as shareholders and officers of the corporation to learn the business operations. When the broth- ers were ready to retire, their offspring bought each brother’s preferential interest. Because the sons and daugh- ters have been actively involved in the corporation’s day-to-day activities, the transition in the business operations was seamless.
Succession Plan Kept Simple XYZ Co. has been owned by
one individual for 20 years who is approaching retirement. He owns 100% of the business and has two sons who get along well and are active
How will the shares of your company be divided among your children or successors when it comes time to leave the business?
2010 and extended though the end of 2012 (Table 1). In addition, an indi- vidual can transfer up to an aggregate of $5.12 million dollars of taxable gifts during his or her life without incurring federal gift tax liability. Spouses can make aggregate taxable gifts of $10.2 million dollars col- lectively during both their lifetimes without incurring federal gift tax liability. If no legislative action occurs before the end of the year, the federal
High gift tax exemptions, coupled with the low business valuations of the metalcasting industry, mean this year presents unique opportunities for owners.
in the business. Business has grown substantially in the last two years, as a few of his competitors have gone out of business and the company has obtained new accounts. Te owner wants to keep the succession plan simple. He has decided to make stock gifts to his sons prior to the end of 2012 and take advantage of the discounts recognized for a minority interest in a closely held business. Tis will facilitate the transfer of appreciation to his sons and allow him to transfer a portion of his estate without gift tax implications.
WHY NOW?
Under the 2012 tax law, the federal estate and gift tax rate is 35%. Te rate was set at the all-time low in
gift tax exemption will decrease to $1 million dollars and the federal estate tax rate will increase to 55%. An aggregate of $5.12 million
dollars can be transferred tax-free for federal estate tax purposes in 2012. Te $5.12 million dollar exemption is reduced by any taxable gifts made by a descendant during his or her life. If the exemption is used during the descendant’s life, no federal estate tax exemption will apply at death. Addi- tionally, married couples are allowed portability, which means any unused portion of the estate tax exemption of the first spouse to die is available for the surviving spouse’s estate in addition to his or her federal estate exemption amount. (Tis would apply if the taxable estate of the first spouse
to die is less than the federal estate tax-free amount and both spouses die before the end of 2012.) If Congress does not take action before the end of the year, the federal estate tax rate portability between spouses may disappear altogether.
TRANSFERS INTO TRUST An unexpected death or disability
can create succession challenges for a metalcasting facility. Te primary purpose of transferring your assets into a revocable trust is to avoid the expense, time and publicity of the probate process. (Additional require- ments may be necessary, depending on the corporate formalities of the entity in which the interest is being transferred.) All assets owned in one’s own name at death, including any shares of stock or limited liability company interest owned individually will go through some form of pro- bate process. Tis could disrupt the deceased’s business if his or her inter- est is involved in the probate process. In addition, business operations could be affected due to delayed decisions or decisions subject to publicity in the probate process. A simple technique to avoid the
probate process and/or provide certain safeguards during any periods of dis- ability is to transfer one’s assets into a revocable trust. Assets transferred into a revocable trust are held by a trustee (typically the business owner). Te owner remains in total control of his or her shares. Transferring shares of a closely held corporation to a revocable trust may be as simple as voiding the existing stock certificates and reissuing new stock certificates in the name of the revocable trust.
June 2012 MODERN CASTING | 31
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