How many times have you received a 500 percent increase on a tax exemption? The federal gift tax exemption did just that – going from $1 million to $5 million for an individual and from $2 million to $10 million for couples – but only for 2011 and 2012.
As a result, you have a unique opportunity to make a monetary gift or interest in your business over the next 21 months that could be tax-free now and shielded from future appreciation from taxes.
Taking advantage of this opportunity may require you to think about some thorny issues that you’ve been putting off – including establishing or finalizing the succession plan for your business, and your retirement and estate plan. It’s important to keep in mind that you can develop a succession or retirement plan without putting it fully into action. And it’s far better to have a plan in place that allows you and your family to take advantage of a more generous tax code while it lasts, than to have no plan in place and miss the opportunity to transfer more of your wealth now.
Communicating Your Gift
If it has always been your plan to gift your business to your family, be sure to discuss it with them. You’ll also want to address how to treat other family members who are not in the business equally and fairly in your estate and succession plan. Even if you’re not ready to complete the transition now, you can gift at least a portion of stock while the gift tax ceiling is low.
When You’re Not Sure
If you are unsure whether you will transition your business to the next generation, it may still make sense to gift a portion of stock to your family now while the gift tax limits are more favorable. If you do eventually sell your business, your family will still benefit from the sale of their shares in the company.
If You Plan to Sell
When you are certain that you will eventually sell your business, you may still wish to gift a portion of stock in the business to family members. As noted above, your family would benefit from the eventual sale of their shares. Knowing that you plan to sell your business allows you to make management decisions that help you grow your biggest investment over time, just as you would grow the funds in your stock portfolio.
Knowing Your Business Value
No matter which path you choose for your business, it’s important to determine its value. A business valuation will help you make management decisions that will enhance the value of your business before and during the transition process. This “investor’s mindset” can help you identify potential risks and minimize them, look for sustainable growth in your product or service lines and keep a close eye on cash flow. The earlier and more frequently you conduct a valuation of your business, the better informed you’ll be when making management decisions that will impact your company’s value.
Ensuring Your Retirement
Along with determining the future of your business, you’ll need to consider your retirement needs. Is your current nest egg enough to sustain you in retirement? You may have time to adjust your current company pension plan by adding a profit-sharing, defined-benefit plan or even staying on at your company as a consultant or salaried employee after the transition. Your financial advisor can assist you in developing ways to meet your retirement as well as your business goals.
Now is the Time
No matter which path you choose to take with your business, you’ll never have a better opportunity to transition wealth to your family than you have during 2011 and 2012. Because sorting through your professional and retirement goals takes time, begin by setting aside planning time to begin the process. Then you’ll be able to present your gifts to take advantage of today’s generous gift tax limits.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 4/27/2011.