How Family Business Prepared for the Fiscal Cliff

A survey by the Pacific Family Business Institute looked at how family businesses in the region prepared for the impending fiscal cliff at the end of 2012. Here’s the press release:

Executive Summary Northwest Family Business Survey II

August 2013

Family enterprise is the lifeblood of the Pacific Northwest. Drawing on early business experience in timber, shipbuilding, banking, trading and new technology, each generation has taught the next to identify market needs and build solid businesses to fufill those needs. Today, more than ever before, family businesses are the cornerstone of our local economy as they continue to thrive, reinvent themselves and compete regionally, nationally and globally.

In support of family business, the Pacific Family Business Institute conducts surveys to better understand the benefits and liabilities of owning and operating a family-owned business. This most recent survey, Northwest Family Business Survey II: Impacts of the American Taxpayer Relief Act of 2012 on Family-Owned Businesses, focuses on how businesses anticipated preparing for the December 31, 2012 deadline, which actions businesses actually undertook, and how businesses were affected by those actions.

About the Northwest Family Business Survey II

Survey Findings

The Pacific Family Business Institute wanted to understand what decisions and actions were undertaken by family-owned businesses in preparation for the tax changes looming at the end of 2012 and how those actions affected the businesses.

Family-owned businesses were asked to indicate which actions they completed in preparation for the deadline, which actions were their top priorities, and which actions they were unable to complete before the deadline. Their responses are displayed below:

About half of businesses undertook some action as the December deadline approached, primarily gifting of shares (30%), transferring shares to family, updating or creating a will (25%), and making distributions (23%). Most of those who took action completed more than one of these actions.

35% ranked financial and tax issues as a top priority. Approximately 15% of respondents rated financial and tax issues associated with the deadline as their highest priority; 20% considered them a high priority; and 23% ranked them as a priority.

Businesses were motivated to address long-term planning issues. Looking back on the actions they undertook during this time period, about one-third of respondents felt they had achieved most or all of their goals and one-third felt they had achieved some of their goals.

25% made a structural change to their business. Of that group, many businesses added family members or non-family members to the board, while about three-quarters of respondents did not make a change to the structure of the board.

25% began or completed a written succession plan during this time. The vast majority of respondents did not transfer majority ownership in order to take advantage of lower tax rates, and most made no changes to the structure of the board.

25% believe their business was better off after the deadline; 8% feel their business is worse off.

Background

Fiscal Cliff: At the end of 2012, much was made of the fiscal cliff, which included many potential tax increases resulting from the pending expiration of the Bush tax cuts. If new legislation failed to pass, dividends would be taxed at ordinary income rates, estate/gift taxes would increase by 20- 55%, and the lifetime exemption for the gift tax would be reduced from $5 million to $1 million.

Law Passed: On January 1, 2013, The American Taxpayer Relief Act was passed as a compromise measure that maintained the lower tax rate established by many Bush tax cuts, but created a higher tax rate at upper income levels. From the perspective of many family-owned businesses, the most significant components of the Act were that gift and estate taxes increased only five percent and the lifetime exemption for the estate/gift tax was maintained at $5 million.