Is 2012 the last great year to preserve your family business?

by Stephanie Hathaway
Partner, Moss Adams LLP

If you’re a business owner, you’re probably so involved in operating your business that it’s hard to find time to focus on your own financial and estate planning.

In 2012, business owners and others with accumulated wealth have a unique opportunity to preserve their assets for the benefit of family and other heirs.

Current favorable income, estate and gift tax rates and exemptions are due to expire on December 31, and unless Congress takes action this unprecedented opportunity will be gone.

Right now individuals can transfer (via gift or bequest) up to $5.12 million in assets without owing any current transfer taxes. Total transfers above that amount are taxed at a rate up to 35 percent. In 2013, however, the gift and estate tax exemption decreases to $1 million and the top transfer tax rate increases to 55 percent. So a transfer of $5.12 million via gift or bequest in 2012 can be made tax-free, but that same transfer in 2013 will be subject to federal estate or gift tax of more than $2 million. What’s more, for 2012, capital gains are taxable at zero or 15 percent. In 2013 that increases to 23.8 percent.

What does all this mean for a family-business owner? Quite simply, if you’ve considered selling your business or transferring ownership to other family members, now is the time to aggressively pursue your options.

Some will choose to wait and see whether Congress extends current favorable tax provisions. However, if you fail to take action until late in the year, there may not be time to explore and execute the more beneficial transfer strategies that are still available.

For most family business owners, your business is likely the largest asset you have and will likely be the largest asset in your estate. Your gift and estate plan must address some key questions:

Does your plan provide for the continued long-term success of your business?

Will the expected estate tax liability (payable nine months after the owner’s death) force your heirs into a fire sale of the business to generate enough cash to pay the estate tax?

What’s the value of the business and your overall estate today?

Does your plan take into account how those values will change in the future?

Does your plan leverage current favorable tax rates and discounting strategies to reduce the total gift and estate tax burden on transferring the business?

Have you taken advantage of asset transfer strategies that can help you pass wealth to future generations and still preserve your ability to take care of your own cash flow needs?

As a business owner, you may be surprised and dismayed by the potential cash impact of estate taxes on your business—you may not perceive yourself as wealthy, possibly because so much of your wealth is illiquid and tied up in the business.

However, this combination of high estate value and low liquidity is what makes it particularly important for family business owners to have a gift and estate plan that protects the long-term prosperity of the business, provides for lifetime financial security of the owner, and creates adequate liquidity to satisfy the projected estate tax liability.

Whether you’re planning to retire now or 20 years from now, actions you take this year can help determine whether your family business will continue to provide opportunity and financial security for your heirs.

Stephanie Hathaway works with family-owned businesses on tax and estate planning, business succession planning and more. She can be reached at 360-676-1920 or at

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