Rising Gft Tax Urges Small Family Business Owners To Plan for Succession

 CONTINUITY

FAMILY BUSINESS CONSULTING 

US/CANADA: 877-925-5149 INTERNATIONAL: 1-978-925-5149

CONTINUITYFBC.COM

Currently, an individual can gift, over his lifetime $5.12 million tax-free. Starting in 2013, the lifetime limits on gift tax will fall from $5.12 million to $1 million. This change in tax exemption rates between 2012 and 2013 could factor into your small business succession plans.

The complicated history of the gift and estate tax dates back to the tax cuts passed under President George W. Bush, starting in 2001. 

Those laws enforced by Bush gradually increased the dollar amount exempt from gift and estate taxes. Congress wrote the law to expire in 10 years, with the exemption reverting back to the old levels in 2011. In December 2010, the Tax Relief, Unemployment InsuranceReauthorization, and Job Creation Acts were signed into my by President Barack Obama as a compromise bill, extending the Bush cuts through 2012 and holding the gift tax exemption at $5 million ($5.12 million in 2012, adjusted for inflation). 

The compromise bill called for the lifetime gift tax exemption and gift tax rates to revert to 2001 levels of $1 million, starting in 2013. 

“Assuming a parent wants to turn over 100 percent of the business to his children, the best year to do it is in 2012,” (BusinessWeek.com). There are many other factors to consider in business succession including managerial roles, how the business assets will be divided up between the children, and whether the company founder is ready to give up complete control (BusinessWeek.com). 

Blair Trippe, Partner and Consultant at Continuity Family Business Consulting, says to also carefully think about voting control when transferring ownership of a family business. You wouldn’t want siblings who own and work in the business to be essentially working for their siblings who also are owners. Those not actively in the business may not be in a position to make good decisions for the business and hence shouldn’t have voting control. 

This exemption on gift tax expiration is the perfect opportunity to decide who will take the reins of the business and put the plan into action. Oftentimes business owners hesitate to make that call because they worry about whether their offspring can handle the money and responsibility, and whether they will be able to withdraw enough funds from the business to live comfortably in retirement. 

Blair Trippe also says it’s not just about saving on taxes. “Be sure not only to consider tax savings, but to consider what will be thought of as ‘fair’ in terms of diving up assets, and what will benefit the family most over the long term. This can be approached in many different way so it’s important to be clear on the intentions behind the transfer of ownership, not just the savings on the taxes.”

Transitioning a business from one generation to the next is probably the most difficult and complex process a family business will face. Contact Continuity Family Business Consulting to assist in the process. We work closely with estate planners, CPA’s, key non-family executives and family stakeholders both in and out of the business in order to develop a plan that works for both the company and the family. Contact us at 877-925-5149 or email us at info@continuityfbc.com.