All planning (whether for your business, finances, estate or family)
is an on-going and continuous process that must be modified and adapted
to changing circumstances. It would be an understatement to say that
over the last year our individual and business lives have changed.
Change can affect people in many different ways. Some respond by
becoming apprehensive and discontinue all planning activities to focus
on short-term needs. Others respond to change by looking for new
planning opportunities that the change may have created.
Surely, with the slowing economy and depressed markets, we have all
reacted with some amount of apprehension and have taken initial steps to
evaluate and address these changes for the short-term. However, we
should not lose sight of our long-term planning goals and objectives for
our businesses and families.
It is my assertion that now is an opportune time for long-term
planning. In particular the recent changes in the economy, the markets
and tax law have created significant opportunities for business
succession planning. All business succession plans are an integrated
product, combining the business and management goals with personal and
family goals in a cost efficient manner. It is this cost component of
the plan that has become an opportunity due to the economic and tax law
changes.
One major component of all succession plans is the transfer of
ownership of the family business to the next generation. The transfer of
ownership represented by the family business can be accomplished in
essentially two ways during your lifetime; gift or sale (or a
combination of these methods). Due to the changing economy, both of
these transfer methods have become less costly.
Most business valuations have dropped due to the economic slowdown.
This allows the business to be gifted or sold at a lower cost to the
next generation. The lower values can reduce gift tax exposure and make
a potential sale much more affordable. In addition, interest rates have
not increased and remain relatively low. For example, the annual
applicable federal interest rates published by the IRS for family
transactions range from 2.85% to 5.6%. This also makes a sale much more
affordable to the next generation.
Moreover, these federal interest rates are used in many different
gifting techniques and lower interest rates increase the leverage
provided. Lastly, the tax laws have recently been changed to increase
gift tax exemptions and reduce gift tax rates over time. Also, there
have been some recent court decisions that are friendly to taxpayers
that have also reduced the gift tax cost associated with various gifting
techniques.
If your plan has been delayed due to recent events, now is an
excellent time to dust if off and get started again. As the economy
strengthens, interest rates rise and tax law evolves, it may cost
significantly more to accomplish your goals if you wait.
