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For Private Company Owners, Exit Planning and Estate Planning Should Go Hand-in-Hand

Jeffrey W. Clark, CPA, MST Director, Tax Strategies, Small Business Advisory

As business owners look into the horizon and contemplate their exit strategy, it’s very important to dovetail that strategy with a solid estate plan. For many private company owners, their business represents their largest asset, by far. So it is of critical importance to maximize the company’s transferrable value and preserve it for the owner’s family both as part of the exit plan as well as the estate plan.

Taking steps to maximize the value of your business and ensure it is “sale ready” should happen well in advance of an exit. Many times, a business owner may not be actively seeking a buyer when a competitor or strategic investor comes knocking at their door. So you want to be sure your business is ready if and when that unanticipated offer arrives.

As part of the exit planning process, you want to be sure you can answer the following questions:

  • What is the value of my business?
  • Is my business safe from creditor risk?
  • Should I transfer my business to a family member, key employee, or unrelated third party?
  • When should I exit?
  • Will I need to remain in my role with the business after the transfer in order to maximize its transferrable value?
  • How can I minimize income taxes on the transfer?
  • What will the capital gains tax rate be when I sell my business?

As you can see, those last two questions in particular illustrate how the exit planning process coincides with the estate planning process. Estate planning should include both the business asset as well as the business owner’s personal assets. The primary objectives of estate planning are to preserve wealth and provide financial security for your heirs. Over the years, you and your family have become accustomed to a certain standard of living, so you’ll want to be sure your family will continue to receive the same income stream they’ve come to enjoy.

Questions to consider in regard to estate planning include:

  • Should I be gifting shares of my business to family members now to reduce estate taxes?
  • Should gifts to family members be direct or through the use of Trusts?
  • How can I meet my philanthropic goals?
  • How can I be sure the same result will occur if my business is transferred upon my death as it would during my lifetime?
  • What strategies should be employed to reduce the burden of the federal estate tax?
  • Will my family have sufficient income for their lifetime?
  • What if I die before exiting the business?

The last bullet point is especially important, even if you’re not contemplating a sale. Should the unthinkable occur, having a buy-sell agreement between owners will ensure a smooth transition. This will help prevent a situation in which your business partners have to run the business with your spouse should you die and they inherit your stock. In addition, adequate life insurance is critical for sole owners, as quite often the value of the business dies along with the sole owner.

As of the time of writing, changes to the estate tax provisions under the Biden Administration remain uncertain. During his campaign, President Biden proposed taxing the wealthy through a decrease in the lifetime exemption (currently $11.7 million for individuals and $23.4 million for married couples) down to possibly $3.5 million. His most recent proposal is to eliminate the step-up in basis provision by subjecting unrealized gains in appreciated assets to an income tax at death. This would be in addition to the estate tax. Between the income tax on appreciated assets and the estate tax, the total taxes at death could be as high as 61 percent.

If enacted, any proposals would likely go into effect in 2022. So while we can’t be certain what changes may take place in 2022, we do know that planning for all potential scenarios is critical.

Please contact any member of our Tax Strategies team for assistance with crafting an exit and estate plan tailored to meet your goals and the lifestyle of your family. Kreischer Miller’s Business Advisory Group also provides business valuation services to assist in your exit planning strategy.

Jeffrey W. Clark can be reached at Email or 215.441.4600.

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Jeffrey W. Clark, CPA, MST

Jeffrey W. Clark, CPA, MST

Director, Tax Strategies, Small Business Advisory

Small Business Advisory Specialist

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