There are approximately 5.5 million family businesses – more than 80 percent of all companies – in the United States. Many of those family businesses operate here in Gainesville-Hall County and throughout North Georgia.
For family businesses – as well as any small business – succession planning is very important, particularly from a tax standpoint. Without proper planning, the untimely death of a business owner could unknowingly saddle the next generation of the business with a big tax burden.
Alyson Graham, a tax attorney with the Gainesville, Ga.-based Stewart Melvin & Frost law firm, focuses on tax and estate planning in her practice. She talks about the importance of business succession planning, particularly as it relates to taxes.
Question: Why is succession planning so important for a family business – or any small business for that matter?
Alyson: Let me start with a real-life example that everyone is familiar with. When Steve Jobs, the iconic leader of Apple, announced his retirement last month, you can believe that Apple already had a succession plan in place to make sure the company would continue to survive and thrive without him.
The same principles apply to small businesses, and particularly family business owners who want to pass on the fruits of their hard work and success to the next generation.
Succession planning is important to do long before the business owner is ready to retire. Having a plan in place will help provide a smooth transition – if and when the owner retires or were to die unexpectedly.
However, another very important reason for succession planning, that many business owners may overlook, is the tax implications.
Question: So business succession planning is not just about deciding who takes over future management and/or ownership of the company?
Alyson: According to the University of Miami Institute on Estate Planning, more than 70 percent of family-owned businesses do not survive the transition from founder to second generation. The statistics are even higher for subsequent generations.
In a large number of these business failures, the “killer” is taxes – due to poor business-succession planning. Therefore, a well-crafted business succession plan must look at more than who eventually takes over the company. It must also focus on minimizing the tax consequences when an owner bows out – to ensure the survival of the company into the next generation.
Question: There is an old saying that you can never avoid two things in life: death and taxes. But you say there is a way to at least hold those taxes to a minimum?
Alyson: That is what a good business succession plan and estate planning should do. And there has never been a better time than now to take advantage of the current tax laws in your business succession planning.
Question: Why are the current tax laws so important?
Alyson: For estate planning, the biggest headline last year was that Congress set the estate tax exemption at $5 million for individuals and $10 million for married couples. That means that there is no so-called “death tax” if the total assets in your estate are worth $5 million or less.
Any value of your estate over the $5 million threshold would then be subject to a 35 percent tax.
By the same token, the gift tax exemption was set at the same amount as the estate tax exemption, which allows for more tax-free gifts than ever before.
An estate tax applies to the transfer of your assets after you die. While a gift tax applies to the transfer of certain assets before you die.
If a business is subject to such a tax and there is not enough cash, it could be necessary to sell the business just to pay the tax.
Question: The $5 million tax exemption may sound good, but doesn’t it just apply to the wealthiest Americans?
Alyson: Congress only temporarily raised the exemption to $5 million. After next year, the exemption is reduced to $1 million – and that will really impact a vast number of Americans and businesses.
Even seemingly small households commonly have assets worth more than $1 million when you add up everything – like the value in your home, life insurance, 401-Ks, etc. The same applies to a small business, which generally constitutes a significant portion of an owner’s net worth and estate. Values quickly add up in a business – think about the value of the income stream, also the value of assets such as equipment and machinery, computers, buildings and property, vehicles, licenses, even life insurance on key employees.
So you understand why raising the tax exemption level to $5 million is huge for family businesses – and a big incentive for business-succession planning.
Question: Since we never know what Congress will do, does that mean it is important to lock in your business succession plan sooner rather than later?
Alyson: Absolutely, especially in this day and time. Not only do we have the highest exemption ever allowed through 2012, with the slow economy of the last few years, the value of many businesses is likely to be at a lower level.
Therefore, it may be extremely advantageous in these economic times – particularly for the owner of a family business – to begin shifting assets and ownership to the next generation while the value of the company is at a lower level. This transfer of wealth can be accomplished by any number of methods which should be tailored to your specific needs and goals.
By shielding the tax liability of your family company at today’s value, you and your heirs – the next generation of your company – would not have to pay extra estate or gift taxes on down the road when your business appreciates in value (or if Congress were to lower the estate and gift tax exemptions). This also allows the owner to protect against the forced sale of the business to pay the taxes due.
Question: So, there are many reasons for family and small businesses to have a succession plan in place – and taxes are one of the biggest reasons, correct?
Alyson: To summarize, business succession planning should be a priority for every business. You don’t need to put off decisions about future management and ownership, because it could threaten the survival of your business and the livelihoods of your family and employees.
And the taxes component of business succession planning is just as important for the future of your business as it is to keep your bottom line under control in the present day.