Business Succession: Is 2012 The Year?

“I’ve heard recently about the federal gift and estate tax window of opportunity for asset transfer, and was wondering if that impacts succession planning. Will there be greater tax benefits for me to leave the business in 2012, rather than 2013?”

Success in business is often dependent on good timing. Business owners time the market, time their sales, time their marketing, time their expansion, and just about everything else. Logically, then, succession planning for your business requires careful timing.

A recent article in Businessweek, titled Family Businesses Should Plan Now for Rising Gift Tax, took up the matter of succession timing. In fact, the timing component of succession planning may be more important now than in recent times, especially given the state of gift and estate laws. The current exemptions and rates were the fruit of the “great compromise” between the White House and Congress at the end of 2010. The compromise created a lifetime gift tax of $5.12 million (adjusted for inflation) for 2012, but only guaranteed that amount until the end of 2012.

As a result, if you want to transfer large assets – like a business – then 2012 may be the year. The current $5.12 million will default to $1 million at year’s end, unless the White House and Congress agree to retain the current exemption.

So 2012 may be the year – perhaps the last year – to transfer large assets with such a generous tax exemption. Depending on the value of your business, 2012 may be the year to make your move. This is especially true if your business is valued at more than $1 million and would be at risk were the laws were to sunset.

Of course, as a general rule of thumb, it is oftentimes easier (and more efficient) to transfer a business incrementally since, if nothing else, it can be monitored and protected at each stage.

In the end, be sure to engage competent counsel before taking action. There are some very complex issues that need to be considered, to include valuing the business itself, structuring the transfer and a very open tax issue regarding a potential “clawback” in the future.

This is not a DYI project.

Reference: Bloomberg Businessweek (March 19, 2012) “Family Businesses Should Plan Now for Rising Gift Tax

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