Financial experts are now saying that it may be a good time for people to consider planning their estates if they have not done so yet. Estate planning laws are currently ideal for asset protection and transferring wealth while avoiding taxation. Business owners in Florida who are near the end of their lives and are looking to pass their assets on to their heirs may want to act quickly in order to take advantage of the 2012 rules.
Until the end of 2012, a person is able to gift up to $5,120,000 without paying gift tax, while the exemption for estate taxes is the same amount. However, these exemptions will drop to $1 million in 2013. Also, the estate tax rate is set to increase from 35 percent to 55 percent. Essentially, it will become more expensive to transfer assets to heirs beginning in 2013.
Suppose a person owns a company with $20 million in sales and $4 million of earnings before interest, taxes, depreciation and amortization (or EBITDA). This means that the company is worth approximately $24 to $32 million, since most companies sell at about six to eight times EBITDA. However, suppose the company’s EBITDA was $6 million not too long ago, which means it could have the potential to sell for quite a bit more if EBITDA again reaches the previous level. The business owner, who is close to the end of his life, may want to begin transferring the ownership of his business now in order to take advantage of the 2012 estate planning rules rather than waiting for an increase in EBITDA which may or may not occur.
In order to do this, the business owner could begin transferring ownership in the business while the company’s value is relatively low. This would allow him to pay less taxes than he would have to in 2013 when the estate planning rules require an increase in the estate tax. Business owners in Florida and elsewhere could transfer ownership to an entity, such as a partnership which discounts the value of the company inside the entity.