Many leaders of small, family-owned companies groom their children to take on the role of a business leader early on. While many understand the benefits of keeping leadership within the family - such as protecting wealth and limiting their tax liability exposure - building an effective succession plan can still be challenging.
As 2012 nears its end, and uncertainty surrounding potential tax law changes lingers, there are several components on which business leaders should focus to build a viable succession plan. The estate tax exemption is expected to fall to $1 million from its current $5 million if the government does not extend the current rules, and the tax rate will rise to 55 percent, from its current 35 percent. As a result, the cost of transferring a business that is valued above $1 million may be more costly in 2013.
Incorporating future beneficiaries into day-to-day operations can certainly mitigate issues when they eventually take over, but employing legal and tax safeguards is also critical.
For example, existing owners should first determine the amount of wealth they want to retain, the amount to be passed on to heirs, and the available tools for minimizing estate and gift taxes when they eventually transfer wealth. Typically, most business owners rely on trusts to keep wealth intact and shielded from estate taxes. While trusts are effective in protecting family wealth, there are several types, most of which are complex and require professional assistance to set up.
However, there are a number of options which enable family-owned businesses to choose the tool that works best for their unique circumstances. Financial advisors are urging companies to cement their succession plans quickly and help mitigate the potential costs of tax law changes.