How Do Uncertain Times Impact Family Businesses?

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Family businesses require careful planning for future longevity.

Very careful.

You are a small or mid-sized business owner.

In fact, your business is a family business.

Perhaps you started it yourself.

Maybe you inherited it from your parents.

You want to pass this legacy on to your own children and grandchildren.

Unfortunately, times are uncertain and the economy is precarious.

According a recent St. Louis Business Journal article titled “How family businesses can come out on top in presidential election uncertainty,” strategic planning is essential to the survival of your family business.

What should you consider?

Family businesses are in danger under uncertain times.
Family businesses can survive challenging times and changing circumstances.

Taxes.

The federal estate and gift tax exemption threshold is currently $11.58 million for individuals.

At this time, the exemption limit is set to continue through the end of 2025.

After this time, the amount will revert to the $5 million (as indexed for inflation) for individuals.

This was the pre-Trumpian exemption level.

Depending on the political winds, the exemption could be phased out before 2025.

This could become a problem for family business owners.

Future gifts may not enjoy this generous exemption.

Transfers above the threshold could be subject to taxes up to 40 percent.

Accordingly, the time to make yuge intergenerational transfers is right now.

Why?

The IRS has confirmed that completed gifts made now with the current exemption limits would not be “clawed back” if the exemption drops in the future.

Wow.

But read on.

It gets sweeter, especially right now.

Property valuation.

It could benefit you to take advantage of lower property valuations, too.

Gifting to loved ones while the value is lower can decrease capital gains taxes and allow for your family to enjoy the growth in value.

In fact, the valuation discounts currently available may allow you to pass substantial portions of your business to your heirs tax free.

How so?

You give a portion of your business valued at $1 million to your child.

When you die, the value of this portion of the business has appreciated to $10 million.

This leaves $9 million out of your taxable estate and only uses up $1 million of your federal tax exemption.

This is especially beneficial if the federal tax exemption threshold is lowered before 2025. (See above.)

What are some other ways to protect your family business?

Prepare for family conflict or tragedy.

Deaths, divorces, and disabilities of key owners and employees can destroy family businesses.

You can protect your family and business through estate planning with an experienced estate planning attorney.

Consider reorganizing the business.

Do you own an S-corporation?

If yes, you know estate planning can be particularly complicated for you.

What can you do?

You can reorganize the business.

By doing so you can divide the business into voting and non-voting shares.

You can gift non-voting shares to your family as part of your estate planning strategy.

This allows you to decrease your taxable estate while maintaining control of your business.

Preparing for future ownership alternatives.

Your goal is to have your family business remain in the family.

Flexibility for cash flow is something you need to consider.

You could consider techiques such as entity freezes, Grantor Retained Annuity Trusts (GRAT), or even sales to transfer future appreciation of assets out of the estate while retain cash flow access.

When it comes to passing a family business successfully to the next generation, you should not attempt this alone.

Working with an experienced estate planning attorney can help you pass on your legacy in a tax-efficient manner.

Reference: St. Louis Business Journal (April 3, 2020) “How family businesses can come out on top in presidential election uncertainty”