Thursday, December 6, 2012
Borrowing from friends and family? Make sure your benefactors make the loan in the most tax-efficient manner...send them this article...and they might take the hint!
Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000 and the borrower doesn't use the loan proceeds to buy or carry income-producing assets.
In addition, if you don't charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e. written agreement with payment schedule) and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan--or the IRS decides to audit you and decides your loan is really a gift.
Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it's legally binding.
As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.
AFRs for term loans, that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which change frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.
Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, in this case your daughter cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest--as long as the promissory note for the loan was secured by the residence.
Wednesday, November 14, 2012
The President's 'amen corner', also known as the mainstream media, is reporting today's unemployment figures show that the Obama Administration has now returned the unemployment rate to 7.8% , exactly where it was when President Obama took office in January 2009.
I took a few minutes to look at the underlying data on the Bureau of Labor website. After factoring in over 5 million Americans who have dropped out of the workforce, the real numbers show a disheartening increase of 2.9% in the unemployment rate from 7.8% to 10.7%
As every small business person knows the economy remains extremely soft.
Here's the seasonally adjusted numbers as released by Dept of Labor
|Jan ---2009||Sept --2011||Sept --2012|
|Eligible population over 16||234,739,000||240,071,000||243,772,000|
|Participation in work force||154,236,000||154,004,000||155,063,000|
|Work force participation percentage||65.7||64.1||63.6|
|Unemployment rate per Obama Admin||7.8||9.0||7.8|
Adjusted for "permanent" unemployed
|Percentage Participation at Jan 2009 level||65.7||65.7||65.7|
|Participation at Jan 09 level||154,236,000||157,726,647||160,158,204|
|Unemployed at Jan 09 level||12,049,000||17,619,647||17,184,204|
|Real Unemployment rate %||7.8||11.2||10.7|
Thursday, October 18, 2012
The AICPA's Tax Letter in October 2012 summarizes two key changes impacting valuations for Estate Tax. The first addresses Alternative Valuation dates, and the second deals with Special Use Valuations.
...Generally the value of property includible in a decedent’s gross estate is its fair market value (FMV) on the date of the decedent’s death. Two special valuation provisions may be elected—under Sec. 2032, to value the property on the alternate valuation date (AVD), and under Sec. 2032A, to value real estate used in farming or another business based on its special use, rather than its highest and best use. Reproposed regulations were issued to limit the availability of the alternate valuation date provision, and a district court declared invalid a provision of the special use valuation regulations.
Alternate Valuation Date
A decedent’s estate may elect to use the AVD if that date results in a valuation of the decedent’s estate that is lower than its date-of-death valuation and results in a combined estate and generation-skipping transfer (GST) tax liability that would have been less than such liability on the decedent’s date of death. For property that is distributed, sold, or otherwise exchanged within six months of a decedent’s date of death, the AVD is the date of the distribution, sale, or exchange (the transaction date). For all other property includible in a decedent’s gross estate, the AVD is the date that is six months after the decedent’s date of death (the six-month date).
In 2008, the IRS issued proposed regulations3 under Sec. 2032 in an attempt to change the result in situations similar to Kohler,4 in which the Tax Court held that valuation discounts attributable to restrictions imposed on closely held stock pursuant to a post-death reorganization of the closely held company should be taken into consideration in valuing the stock on the AVD. On Nov. 18, 2011, these regulations were withdrawn and reproposed.5
The reproposed regulations would amend Regs. Sec. 2032-1(c) to identify transactions that require the use of the transaction date for purposes of Sec. 2032 (nine types of transactions are listed). If an estate’s property is subject to such a transaction during the alternate valuation period, the estate must value that property on the transaction date. The value included in the gross estate is the FMV of the property on the date of and immediately before the transaction.
Two exceptions to this general rule would allow the estate to use the six-month rule. One exception is for exchanges of interests in the same or different entities provided the FMVs of the interests before and after the exchange are deemed to be equal. The other exception is for distributions from a business entity, bank account, or retirement account in which the decedent held an interest at death provided the FMV of the interest immediately before the distribution equals its FMV immediately after plus the amount of the distribution.
Special Use Valuation
One of the statutory requirements to qualify for the special use valuation is contained in Sec. 2032A(b)(1)(B), which provides that 25% of the estate must consist of real property used in farming or another trade or business. Regs. Sec. 20.2032A-8(a)(2) provides that while a Sec. 2032A election need not be made for all property that qualifies for the election, the property for which the election is made must meet the 25% threshold requirement in Sec. 2032A(b)(1)(B). In Finfrock,6 more than 25% of the total value of the gross estate consisted of real estate used in a farming business, but the estate chose to make the special use valuation election for only one piece of farmland that, by itself, represented 15% of the total value of the gross estate. The issue before the district court was whether the regulation is a valid interpretation of the statute.
The district court applied the Chevron test to determine whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, both the court and the agency must give effect to the expressed intent of Congress. If the statute is silent or ambiguous about the particular issue, a court must then determine whether the agency’s interpretation is based on a permissible construction of the statute.
The district court noted that Sec. 2032A does not require that the election be made for real property constituting 25% or more of the value of the gross estate. The 25%-or-more requirement is only a threshold requirement in order to be able to make the election. Once the threshold is met, the only other requirement to qualify the property for the election is to designate the property in a tax recapture agreement. The court concluded that Congress did not require that the designation be of all or a certain percentage of the real property that otherwise meets the requirements of Sec. 2032A, so the statute unambiguously provides that an estate can elect the special use valuation for any portion of the property that qualifies. Noting that Regs. Sec. 20.2032A-8(a)(2) imposes an additional requirement to make an election under Sec. 2032A that is not included in the statute, the court ruled that the regulation was invalid...
Written by Justin Ransome is a partner and Frances Schafer is a retired managing director in the National Tax Office of Grant Thornton LLP in Washington, D.C
Thursday, October 4, 2012
I've been fielding a number of questions about how to file a patent. As usual there is more than one way, which leaves many entrepreneurs scratching their heads. DIY or use a third party professional?
1) DIY...for budget reasons many entrepreneurs like to do as much as possible themselves. For those people, there follows a concise listing of six key points to bear in mind...courtesy of Docstop.
2) The other route is to use a well qualified patent attorney. A good one may charge an eye-watering $750 an hour...but may save you a boat-load of money in the long run particularly if you have a complex legal situation with products entering multiple markets with multiple uses. Chances are, down-the-track, the party that is going to infringe your patent will arm itself with an excellent attorney... so if the seed capital allows for it, it makes sense UPFRONT to make sure you seek the protection of the same caliber of professional.
Before you start filling out an application to register your trademark with the United States Patent and Trademark Office (“USPTO”) online atwww.uspto.gov/trademarks/index.jsp, there are six things you need to know.
1. How Much Does it Cost to File an Application and Which Is Right for Me?
The cost to file an application to register a trademark is either $275 or $375 per mark for each International Class in which you seek registration, depending upon the filing method you choose. If you choose the “regular” TEAS application process, the fee is $375. If you choose the TEAS Plus form the fee is only $275, but there are stricter requirements that must be met – such as requiring that USPTO classifications be used to identify the goods and services, prohibiting “free-text” entries for goods and services identifications and requiring that all communications from the USPTO be received by the applicant via e-mail during the pendency of the application. For further information on what is required to file a TEAS Plus application, go here.
For information on which application you should file, go here and review the bullet point list identifying what youmust agree to if you want to file the less expensive TEAS Plus form. The bottom line is that if you cannot satisfy the TEAS Plus application requirements as identified in the bullet point list, your only choice is to file the “regular” form with the higher filing fee.
2. What Must the Application Contain?
A “regular” TEAS application must contain at least four things, in addition to the filing fee:
1. the owner's name and address;
2. a clear drawing of the mark;
3. a list of the goods or services for which the mark is being used or will be used and the corresponding International Class number(s) that are appropriate for the identified goods or services; and
4. the filing basis.
As discussed above in Paragraph 1, more information is required to file a TEAS Plus application. To take a look at the TEAS Plus online application process and the questions that will be asked, without actually starting the electronic application form, the USPTO provides screen images in a Word document here.
3. Identifying and Classifying the Goods and Services
The USPTO has a searchable index of identifications for goods and services available that they recommend you use for your application. If you are filing a TEAS Plus form you must use these identifications for your goods and services. If you decide to file a “regular” TEAS application, you will be allowed to use identifications not identified in the USPTO index. Also, you can register your trademark for use in connection with more than one set of goods or services. However, if the goods and services you list fall into more than one International Class you will have to pay an additional filing fee. For additional information regarding International Classifications click here.
4. Actual Use or Intent-to-Use
When filing your application, you will need to decide under what “basis” you are seeking registration – either under the “use in commerce” basis (under §1(a) of the Trademark Act, 15 U.S.C. §1051(a)), or the “intent-to-use” basis (under §1(b) of the Act, 15 U.S.C. §1051(b)).
If you have already begun using the trademark in interstate commerce, you should file a use in commerce based application. When filing a use in commerce based application, in addition to filling out the application, you must supply the USPTO with a specimen showing the mark as it is used in connection with your goods or services, as well as the date(s) on which you first used the mark anywhere and in interstate commerce.
If you have not yet begun using the trademark, you must file an intent-to-use application. Initially, you will not be required to submit a specimen and date of first use, but such information must be filed at a later date (after actual usage) for your application to be approved for registration. However, even if filing an intent-to-use application, you must have a bona fide intent to use the mark in commerce. A bona fide intent means more than just an idea.
5. What Happens Next?
Within approximately 3-6 months after you file the registration forms (either use based or intent-to-use) an attorney with the USPTO will examine and research your application. The attorney will contact the person filing the application with any questions or concerns they may have about the application, and with notifications regarding the status of the application.
The USPTO attorney may contact the applicant to resolve an issue with the application, by issuing what's called an "Office Action." If you receive an Office Action, you will have six months in which to respond to any issues raised by the examining attorney.
If the USPTO approves your application, it will publish your trademark in the Official Gazette, and anyone who believes that they would be damaged by its registration (such as a senior user of a confusingly similar mark) will have thirty days in which to oppose registration of the mark.
If no one opposes (or requests an extension of time to oppose) within those thirty days, the USPTO will either approve your mark for registration (if you have already submitted an acceptable specimen of use) or issue a Notice of Allowance (if your application is still based on an intent-to-use). If the USPTO issues a Notice of Allowance, you will have six months from the date on which it was issued to either submit an acceptable specimen, or request an additional extension of time in which to do so. You can request up to five 6-month extensions of time in which to submit a specimen of use. The registration process can easily take 1-2 years, but once it is approved your rights date back to the day on which you filed your application.
6. Trademark Symbol Tips
Do NOT use the circle “R” (®) trademark symbol until a federal registration has issued. Such use is considered fraud and a registration might be denied as a result. Prior to actual registration by the USPTO, use the symbol “TM” to identify your trademark. Only after actual registration has been issued should the circle “R” symbol (®) be used.
Finally, its worth pointing out that many times, I see entrepreneurs waste significant worry time on the patent issue. Before you decide which of the two paths to go down, make sure you ask your business and legal advisers whether it makes sense to invest in patent/trademark protection. You may be surprised how often the answer comes back a resounding NO!
Tuesday, September 11, 2012
Nevertheless, the role of intellectual property rights ( IPRs) and intangible assets in business is insufficiently understood. Accounting standards are generally not helpful in representing the worth of IPRs in company accounts and IPRs are often under-valued, under-managed or under-exploited. Despite the importance and complexity of IPRs, there is generally little co-ordination between the different professionals dealing with an organization’s IPR. For a better understanding of the IPRs of a company, some of the questions to be answered should often be:
What are the IPRs used in the business?
What is their value (and hence level of risk)?
Who owns it (could I sue or could someone sue me)?
How may it be better exploited (e.g. licensing in or out of technology)?
At what level do I need to insure the IPR risk?
One of the key factors affecting a company’s success or failure is the degree to which it effectively exploits intellectual capital and values risk. Management obviously need to know the value of the IPR and those risks for the same reason that they need to know the underlying value of their tangible assets; because business managers should know the value of all assets and liabilities under their stewardship and control, to make sure that values are maintained. Exploitation of IPRs can take many forms, ranging from outright sale of an asset, a joint venture or a licensing agreement. Inevitably, exploitation increases the risk assessment.
Valuation is, essentially, a bringing together of the economic concept of value and the legal concept of property. The presence of an asset is a function of its ability to generate a return and the discount rate applied to that return. The cardinal rule of commercial valuation is: the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances. I adhere to this and the questions ‘to whom?’ and ‘for what purpose?’ must always be asked before a valuation can be carried out.
This rule is particularly significant as far as the valuation of intellectual property rights is concerned. More often than not, there will only be one or two interested parties, and the value to each of them will depend upon their circumstances. Failure to take these circumstances, and those of the owner, into account will result in a meaningless valuation.
For the value of intangible assets, calculating the value of intangible assets is not usually a major problem when they have been formally protected through trademarks, patents or copyright. This is not the case with intangibles such as know how, (which can include the talents, skill and knowledge of the workforce), training systems and methods, technical processes, customer lists, distribution networks, etc. These assets may be equally valuable but more difficult to identify in terms of the earnings and profits they generate. With many intangibles, a very careful initial due diligence analysis needs to be undertaken together with IP lawyers and in-house accountants.
There are four main value concepts, namely, owner value, market value, fair value and tax value. Owner value often determines the price in negotiated deals and is often led by a proprietor’s view of value if he were deprived of the property. The basis of market value is the assumption that if comparable property has fetched a certain price, then the subject property will realize a price something near to it. The fair value concept, in its essence, is the desire to be equitable to both parties. It recognizes that the transaction is not in the open market and that vendor and purchaser have been brought together in a legally binding manner. Tax value has been the subject of case law worldwide since the turn of the century and is an esoteric practice. There are quasi-concepts of value which impinge upon each of these main areas, namely, investment value, liquidation value, and going concern value.
Methods for the Valuation of Intangibles
Acceptable methods for the valuation of identifiable intangible assets and intellectual property fall into three broad categories. They are market based, cost based, or based on estimates of past and future economic benefits.
In an ideal situation, an independent expert will always prefer to determine a market value by reference to comparable market transactions. This is difficult enough when valuing assets such as bricks and mortar because it is never possible to find a transaction that is exactly comparable. In valuing an item of intellectual property, the search for a comparable market transaction becomes almost futile. This is not only due to lack of compatibility, but also because intellectual property is generally not developed to be sold and many sales are usually only a small part of a larger transaction and details are kept extremely confidential. There are other impediments that limit the usefulness of this method, namely, special purchasers, different negotiating skills, and the distorting effects of the peaks and troughs of economic cycles. In a nutshell, this summarizes my objection to such statements as ‘this is rule of thumb in the sector’.
Cost-based methodologies, such as the “cost to create” or the “cost to replace” a given asset, assume that there is some relationship between cost and value and the approach has very little to commend itself other than ease of use. The method ignores changes in the time value of money and ignores maintenance.
The methods of valuation flowing from an estimate of past and future economic benefits (also referred to as the income methods) can be broken down in to four limbs; 1) capitalization of historic profits, 2) gross profit differential methods, 3) excess profits methods, and 4) the relief from royalty method.
1. The capitalization of historic profits arrives at the value of IPR’s by multiplying the maintainable historic profitability of the asset by a multiple that has been assessed after scoring the relative strength of the IPR. For example, a multiple is arrived at after assessing a brand in the light of factors such as leadership, stability, market share, internationality, trend of profitability, marketing and advertising support and protection. While this capitalization process recognizes some of the factors which should be considered, it has major shortcomings, mostly associated with historic earning capability. The method pays little regard to the future.
2. Gross profit differential methods are often associated with trade mark and brand valuation. These methods look at the differences in sale prices, adjusted for differences in marketing costs. That is the difference between the margin of the branded and/or patented product and an unbranded or generic product. This formula is used to drive out cashflows and calculate value. Finding generic equivalents for a patent and identifiable price differences is far more difficult than for a retail brand.
3. The excess profits method looks at the current value of the net tangible assets employed as the benchmark for an estimated rate of return. This is used to calculate the profits that are required in order to induce investors to invest into those net tangible assets. Any return over and above those profits required in order to induce investment is considered to be the excess return attributable to the IPRs. While theoretically relying upon future economic benefits from the use of the asset, the method has difficulty in adjusting to alternative uses of the asset.
4. Relief from royalty considers what the purchaser could afford, or would be willing to pay, for a licence of similar IPR. The royalty stream is then capitalized reflecting the risk and return relationship of investing in the asset.
Discounted cash flow (“DCF”) analysis sits across the last three methodologies and is probably the most comprehensive of appraisal techniques. Potential profits and cash flows need to be assessed carefully and then restated to present value through use of a discount rate, or rates. DCF mathematical modelling allows for the fact that 1 Euro in your pocket today is worth more than 1 Euro next year or 1 Euro the year after. The time value of money is calculated by adjusting expected future returns to today’s monetary values using a discount rate. The discount rate is used to calculate economic value and includes compensation for risk and for expected rates of inflation.
With the asset you are considering, the valuer will need to consider the operating environment of the asset to determine the potential for market revenue growth. The projection of market revenues will be a critical step in the valuation. The potential will need to be assessed by reference to the enduring nature of the asset, and its marketability, and this must subsume consideration of expenses together with an estimate of residual value or terminal value, if any. This method recognizes market conditions, likely performance and potential, and the time value of money. It is illustrative, demonstrating the cash flow potential, or not, of the property and is highly regarded and widely used in the financial community.
The discount rate to be applied to the cashflows can be derived from a number of different models, including common sense, build-up method, dividend growth models and the Capital Asset Pricing Model utilising a weighted average cost of capital. The latter will probably be the preferred option.
These processes lead one nowhere unless due diligence and the valuation process quantifies remaining useful life and decay rates. This will quantify the shortest of the following lives: physical, functional, technological, economic and legal. This process is necessary because, just like any other asset, IPRs have a varying ability to generate economic returns dependant upon these main lives. For example, in the discounted cashflow model, it would not be correct to drive out cashflows for the entire legal length of copyright protection, which may be 70 plus years, when a valuation concerns computer software with only a short economic life span of 1 to 2 years. However, the fact that the legal life of a patent is 20 years may be very important for valuation purposes, as often illustrated in the pharmaceutical sector with generic competitors entering the marketplace at speed to dilute a monopoly position when protection ceases. The message is that when undertaking a valuation using the discounted cashflow modelling, the valuer should never project longer than what is realistic by testing against these major lives.
It must also be acknowledged that in many situations after examining these lives carefully, to produce cashflow forecasts, it is often not credible to forecast beyond say 4 to 5 years. The mathematical modelling allows for this in that at the end of the period when forecasting becomes futile, but clearly the cashflows will not fall ‘off of a cliff’, by a terminal value that is calculated using a modest growth rate, (say inflation) at the steady state year but also discounting this forecast to the valuation date.
While some of the above methods are widely used by the financial community, it is important to note that valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. It is rash to attempt any valuation adopting so-called industry/sector norms in ignorance of the fundamental theoretical framework of valuation. When undertaking an IPR valuation, the context is all-important, and the valuer will need to take it into consideration to assign a realistic value to the asset
Source Kelvin King, founding partner of Valuation Consulting
Wednesday, August 8, 2012
The most popular option pricing model -- Black-Scholes -- is outdated and unreliable, for several reasons:
1. First, it was first published in 1973, when the public trading of options was in its primitive stages. Calls were available on only a handful of listed companies, and puts were not traded publicly at all. With this in mind, the model was a theory only and not based on any market statistics.
2. The model assumes European style expiration (positions can be exercised only on the last trading day). However, options on listed stocks are traded American style, meaning they can be exercised at any time. This changes the assumptions underlying the Black-Scholes model.
3. The model assumes no dividend yield. Options traders know that dividends play a major role in total return and cannot be ignored.
4. The model further assumes that valuation and income have to be compared to an assumed rate of risk-free interest. Under today's odd money market, is this even valid any more?
5. With online trading and Internet access to information, the world of 1973 is practically prehistoric in terms of information flow, transaction speed, and costs.
Although subsequent papers have tried to modify Black-Scholes to make it more in line with market realities,the basic theory has little to do with modern options pricing. An alternative method may split premium into three parts, two of which are specific and easily identified in advance. First is intrinsic value, the in-the-money point spread between current price and strike. This is an exact dollar value. Second is time value, which is also predictable and precise. It can be modeled and isolated so that the rat of time decay is known well in advance -- and it should be unaffected by proximity between strike and current value.
The final leg of value is implied volatility, also called extrinsic value. This is where all of the variables are found. These include the complex interaction between proximity of strike to value, and time to expiration. The calculation of implied volatility is further complicated by historic volatility of the underlined as well as current fundamental and technical volatility of the stock. This may be based on company-specific news or events, or on market-wide perceptions, right or wrong. To get a handle on the complexities of implied volatility in a quick and easy way, check
In other words, it is time for a different and more realistic pricing model.
Source Options expert and author Thomsett
Monday, July 23, 2012
There appears to be six ubiquitous challenges found in inappropriate business valuations
1) The value to be determined may not be appropriately defined.
In many appraisal reports, the specification of the value being determined is missing from the report. A particular standard of value such as the fair market value may be eluded to but not accurately defined. The reader must be certain of its meaning. Different jurisdictions have used varying definitions of fair market value, and the exact nature of this value must be specified in the report.
2) There may be inconsistencies between the value specified and the value utilized.
Sometimes an appraiser may define the standard of value that was supposed to be used in the assignment. During the actual appraisal process, however, the appraiser may erroneously apply a different standard of value.
3) There may be appropriate valuation methods left out.
Appraisers may rely on only one or two “favorite” methods of appraisal. Yet, there may be other appropriate methodologies left out. A full appraisal should consider all of the appropriate appraisal methods in order to provide a system of checks and balances on the individual methods used. Inexperienced appraisers may continually use a particular method, but this may not be the most appropriate or versatile method. The excess earnings method seems to be a favorite of many appraisers but biased selection of methods should be avoided. The availability of information and the circumstances surrounding the appraisal should determine the correct appraisal method, rather than the preferences of the appraiser.
4) Contradictory methods of appraisal may be utilized.
The use of methods that contradict each other is another common error. The facts of the appraisal should lead the selection on the method in a particular direction. Different methods are used in different circumstances. For example, it does not make sense to apply both the Capitalization Method and the Discounted Cash Flow Method, as the former assumes stable income streams, while the latter assumes unstable income streams.
5) The market data may be missing from the report.
Some appraisers may leave out market data that they believe is not locatable. This leads to a major flaw in many appraisals. Market data can actually be found in most situations. At the very least, market data should always be looked for.
6) The Guideline Companies may be poor comparables.
The companies chosen as guideline companies to compare with the appraisal subject must be similar and relevant. Poor comparables make for problematic reports. A typical mistake is when the appraiser selects guideline companies that are too large to be comparable. But note: A company does not have to be in the same line of business. Revenue Ruling 59-60 suggests “same or similar”.
In summary, a number of common errors can and do occur in appraisal reports. The onus rests with the client to engage the most appropriate appraiser for the specified appraisal.
Daniel T. Jordan, ASA, CBA, CPA, MBA
Tuesday, June 5, 2012
From the Wall Street Journal comes a reminder that massive increases in gift and estate taxes is potentially less than 7 months ago. Unless Congress acts before January 1 2013, Americans will see the gift and estate tax exemptions plummet by over 80%:
With the government's $5.12 million gift-tax exemption set to fall to $1 million at year-end, more families are using the current leeway to do some financial housekeeping, experts say.
"Cleanup gifts," as estate planners call them, can be used to forgive intrafamily loans, equalize gifts to children or grandchildren, pass along an interest in a family business or preload a life-insurance trust, among other strategies.
"This is our opportunity to clean up errors and mistakes and make sure things are smooth sailing going forward," says James Lamm, an estate-planning lawyer at Gray Plant Mooty in Minneapolis.
At the beginning of last year, the gift-tax exemption climbed from $1 million for single filers and $2 million for married couples to $5 million and $10 million, respectively, while the top rate fell to 35% from 45%.
Indexed for inflation, the limits this year are $5.12 million and $10.24 million. (Congress changed the limits for estate taxes, too, raising that exemption to the same amount and lowering the maximum rate to 35%, also for two years.)
But the gift-tax exemption is set to go back to $1 million and the top rate to 55% on Jan. 1 unless Congress intervenes. Estate planners don't expect lawmakers to address the issue until after the November election, and at that point some experts consider it likely that even if the estate-tax exemption gets pegged at $3.5 million, the gift-tax exemption could be allowed to fall back to $1 million.
The upshot: If you are planning to make gifts to your family for any reason, it is likely that you have more leeway now than later. And by passing along assets now, you also might avoid future estate taxes, Mr. Lamm says. ,,,
Forgive and forget.
Well-off families who used up the former exemption of $1 million would sometimes turn to low-interest family loans to continue transferring assets to children and grandchildren.
Forgiving such a loan now makes it possible to take advantage of the current exemption without shelling out cash.
It is important to "follow all the formalities" when wiping loans off your balance sheets, Mr. Lamm says. "Otherwise, the IRS might say that it wasn't a loan, that it was a gift back when you made it," which could subject you to a lower gift-tax limit from when you made the loan.
To avoid that problem, some attorneys recommend two independent steps: First, give your child money. Later, he or she can use it to pay back the loan. That way, you give validity to the original loan and avoid the possibility of creating what's called "cancellation of indebtedness income," on which your kids could owe tax, says Todd Steinberg, an estate-planning lawyer and shareholder at Greenberg Traurig in McLean, Va.
Even out the score.
If your grandchildren span a wide age range, your children have different numbers of children or you have been married more than once, the cumulative value of gifts you have made to various family members to help pay for education, weddings, homes or other items might vary widely, says Jay Rivlin, a partner at McDermott Will & Emery in New York.
Mr. Lamm has seen many clients give each grandchild $13,000 a year, the maximum amount that can be given before counting toward the lifetime gift-tax exemption. But since grandchildren are born at different times, "I have seen some cases with a $300,000 to $400,000 spread between the youngest and oldest grandchildren," he says.
To fix those problems, clients often include language in a will or trust to "equalize" gifts to grandchildren. Right now, though, families can address those issues in hopes of avoiding conflicts later, Mr. Lamm says.
Give away the store.
With the current gift-tax exemption and valuation discounts for minority stakes in a business, you could move at least part of a family enterprise out of your estate, Mr. Lamm says. Treasury officials have proposed doing away with such valuation discounts, "so why not lock it in this year?" he asks.
Set up a backstop.
It is a longtime, plain-vanilla estate-planning tool: an irrevocable trust with your children, grandchildren and spouse as beneficiaries.
Now, with a sexy new acronym, so-called spousal limited-access trusts, or SLATs, are getting a lot of attention from people "who are worried about taxes but also about giving too much away," says Robert Morrill, managing partner at Gilmore, Rees & Carlson, a Wellesley, Mass., law firm that specializes in trusts and estates.
Such trusts can get assets out of a husband's or wife's estate while taking advantage of the full gift-tax exemption.
Mr. Morrill encourages clients to assume the surviving spouse isn't going to reclaim any assets from the trust, though there is an escape hatch: The trustee could make distributions for the surviving spouse "if fortunes change after the trust is funded," he says.