J.L. PIERSON & CO. LLC

BUSINESS VALUATION

203-325-2703 [office]

203-504-7925 [fax]

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March 1, 2011

A new tax law was enacted effective Dec. 17, 2010, representing a reasonable compromise, and defining estate, gift and GST taxes for 2010, 2011 and 2012 only. It has significant implications for owners of closely-held businesses: its gifting component alone provides a unique opportunity to shield hard-to-value assets from the gift tax once and for all, even if the new rules will clearly require many to revise their wills and other planning documents.

The estate, gift and GST taxes had been defined by prior law as follows: 2010 no estate tax, and indeed quite a few decedents with estates in excess of the exemption who were “lucky” to die in 2010 did not pay any such tax. The estate tax, as per the 2002 tax act, had a federal exemption of $1.0 million for 2011 and 2012 and a top rate of 55%.

Accordingly, the deal made between the President and the new Republican majority came as a pleasant surprise: for 2011 and 2012 the federal estate tax exemption is $5.0 million and the top rate 35%. For 2010, estates can elect not to pay the tax or to pay the tax with an exemption of $5.0 million and a top rate of 35%.

The basis adjustment at death, under prior law, was as follows: for 2010 it was limited to $1.3 million, plus $3.0 million passing to surviving spouse. For 2011 and 2012, the adjustment was to be equal to the property’s fair market value [“FMV”] at the date of death or the alternate valuation date.

If a 2010 estate elects not to pay the tax, the adjustment is unchanged. If the 2010 estate elects to pay the tax, then the adjustment is equal to the FMV at the date of death or the alternate valuation date. 2011 and 2012 basis adjustment is now equal to the FMV at the date of death or the alternative valuation date.

Gift taxes under prior law had a federal gift exemption of $1.0 million and a top rate of 35% for 2010. Again under the old law, the 2011-2012 exemption was $1.0 million and the top gift rate 55%. Accordingly, the gift tax rules under the new law appear generous, and can offer planning opportunities.

For 2010, the federal gift exemption is $1.0 milion, and it becomes $5.0 million for 2011 and 2012. The top rate is 35%.

This presents 2011 and 2012 only opportunities whereby the tax payer gifts property to his/her children without incurring the gift tax; moreover, the appreciation is forever removed from his/her estate, and income could accrue to someone in a lower bracket. The $5.0 million lifetime exemption, particularly when combined with a spouse’s, allows most business interests except the very largest to be transferred inside a family without gift tax. This decision by our government is particularly welcome by “baby-boomers” who have been building up businesses and have children now presumably capable of taking over. This is particularly true in a high-tax state like New York, which while it has a low estate exemption, has no gift tax.

No review of the new law is complete without covering the provisions of the GST tax. Under prior law, there was no GST tax in 2010, and 2011-2012 exemptions was $1.0 million and the top rate 55%. Under the new law, the 2010 GST exemption is $5.0 million and the tax rate 0%; the 2011-2012 exemption is $5.0 million and the top rate 35%. As of this writing, the Service is busy drafting the forms !

Another “goody” is included in the new law: the portability of unused lifetime exemptions, which can be utilized by the surviving spouse for both gift and estate tax purposes, but not GST purposes.

Credit shelter [bypass] trusts which are no longer necessary due to portability, are still required if one wishes to shelter the increased value of trust assets that occurs between first and second deaths.

The new law is silent on the subject of GRATs or grantor retained annuity trusts. At first glance, GRATs would still apply as an estate planning tool. Also silent in the new law is the matter of discounts for lack-of-marketability and minority discounts; it would follow that reasonable discounts can still apply.

Please consult your estate planner, attorney or CPA to determine how the law applies to your situation. If you have any question about valuation issues, please do not hesitate to call us.

                                                                                      J.L. PIERSON, ASA

                                                                                      Managing Member