How closely held business owners can defer estate taxes

Depending on the size of your closely held business, estate taxes can be a significant burden when you pass ownership from one generation to the next. Fortunately, the tax code provides some relief, allowing eligible estates to defer the payment of certain estate taxes for up to 14 years. To qualify, several conditions must be met:

• The deceased must have been a U.S. citizen or resident at the time of his or her death,
• The deceased’s business must have been closely held — that is, it was either 1) a sole proprietorship, or 2) an interest in a partnership, limited liability company or corporation that meets certain ownership requirements,
• The business must be engaged in an active trade or business (as opposed to holding passive investments), and
• The value of the deceased’s interest in the business must be more than 35% of his or her adjusted gross estate.

If your estate qualifies, the executor may elect to defer the portion of estate tax that’s attributable to the closely held business interest for up to 14 years. The estate pays interest only for four years and then pays 10 annual installments of principal and interest.

Alternative IRA investments: Handle with care

Most people use their IRAs to hold stocks, bonds and mutual funds. But some people opt to place their IRA funds in alternative investments — such as real estate, closely held business interests, precious metals or cryptocurrencies — in an effort to boost their returns. To do so, your IRA custodian must permit such investments, or you must open a “self-directed” IRA.

Alternative investments can be risky, so consult your tax advisor to avoid potential tax traps. For example, if the IRS concludes that an IRA investment involves self-dealing or prohibited transactions with related persons or entities, you may immediately be subject to taxes and penalties on your entire account balance.

In a recent case, the Tax Court held that a couple wasn’t permitted to invest IRA assets in gold and silver coins stored in a safe in their home. Because they had complete, unfettered control over the coins and were free to use them in any way they chose, the value of the coins was treated as a taxable distribution.

Increased annual gift tax exclusion for 2022

For the first time in several years, the IRS has raised the annual gift tax exclusion, from $15,000 to $16,000 per recipient, effective January 1, 2022. If you regularly make annual exclusion gifts to children or grandchildren, or contribute to trusts or college savings plans for their benefit, consider increasing the amounts of those gifts.

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