Is 2012 the Last Great Year to Preserve Your Wealth?

Most business owners are so focused on running their business that it becomes easy to postpone taking care of their financial and estate plans. However, 2012 is different. Over the next 11 months business owners have an unprecedented opportunity to preserve more of their hard-earned wealth and give less to the IRS. This is thanks to favorable income, estate, and gift tax rates and exemptions that, barring an unlikely extension by Congress, will expire on December 31.

Specifically, the gift tax exemption in 2012 allows individuals to gift up to $5.12 million without incurring any current cash transfer taxes. Any amount beyond that would be taxed at a rate of 35 percent. In 2013, however, the exemption amount returns to only $1 million, making it all the more important for you to explore planning strategies sooner rather than later.

Additionally, for the remainder of the year, capital gains continue to be taxed at 0 or 15 percent. Starting January 1, 2013, this rate will increase to 23.8 percent. What does this mean for a family business owner? Quite simply, if you are in the market to sell your business, now is the time to aggressively pursue your options.

Even if you are not thinking of selling your business now, 2012 is the year to review the structure of your organization to ensure that you are running your business in the most tax-efficient manner possible and are positioned appropriately for any future transactions.

Of course, you could hold out to see whether Congress extends some of these favorable tax provisions. But for most, the potential tax savings now are simply too significant to ignore.

Know Your Wealth, Know Your Needs

How much of your net worth is tied up in your business? For most family business owners, your business is likely your largest asset and probably makes up a significant portion of your total estate. Therefore, your estate plan must consider a number of topics, including:

Does your plan provide for the continued long-term success of your business? Or will future estate tax liability necessitate a fire sale to raise sufficient cash to cover estate taxes?

• Whats your estate worth today, and how much might it be worth in the future?
• Does your estate plan leverage current tax rates to reduce your estate taxes?
• Do you have excess wealth you can afford to pass on to future generations without concern that you will need it later?

Many business owners are surprised when they realize the cash impact estate taxes can have on their business intereststhey dont perceive themselves as wealthy, possibly because their wealth is tied up in an illiquid asset (their business). However, for many family business owners, the fact that their estates are illiquid is one of the biggest issues that must be addressed as part of their estate plan, along with determining how to maintain financial security for the remainder of their lifetime.

Aligning the Sale of Your Business with Your Estate Plan

The effectiveness of your wealth preservation plan also depends on how you transition your ownership interests when it comes time to exit or sell your business. You may be far away from the day you want or need to sell your business. But whether your plan is to sell the company in two or 20 years, aligning your company so it is organized in a manner to maximize transferable value while minimizing tax costs will help provide for a smooth transition. It can also help raise the likelihood that the value you get from a sale will meet the long-term needs of both you and your loved ones, so you can maintain your lifestyle long after the sale.

Taking into account your business considerations as well as personal ones will help you understand how much money you need from the sale of your business to support your personal and family financial goals and whether an opportunity to sell your business is the right one. It will also force you to address important ownership and management succession issues, such as identifying the next generation of company leaders.

For most high net worth family business owners, the opportunities presented in 2012 cannot be ignored as they represent an unprecedented occasion for permanent estate, gift, and income tax savings.

Dan Gaffney, CPA, and Jennifer Keeney, CPA, work with family-owned businesses on tax and estate planning, business succession planning, ownership transitions, and more. They can be reached at (425) 259-7227 or at [email protected] or [email protected], respectively.