By Liz Briggson and Kaylee Simerson
Estate planning and exit planning generally share common goals around financial security, tax minimization, and providing for people, so it is essential for these two plans to complement one another. Estate planning takes time. Business owners who begin their estate planning as early as possible in the exit planning process will enjoy a greater selection of strategies to deploy.
Preparing for an exit involves thoughtful planning inside the business and planning for life events outside the business. A Mercer Capital statistic estimated that business owners may have 80% of their net worth in the value of their business, highlighting the importance of understanding the value of the business owner’s most valuable asset. We previously discussed the importance of preparing for the future by understanding the value of your business.
Become Informed and Understand Options
A business valuation allows business owners, along with their advisors, to plan for an exit with realistic expectations around sale outcomes and potential proceeds. This foresight supports estate and exit planning in a few ways:
- Highlights which exit strategies are most likely to support the seller’s primary goals (we will address internal and external exit options in future articles).
- Enables informed financial planning decisions for the selling business owner and their family.
- Empowers the exiting business owner to make proactive plans to deploy tax-advantaged strategies that support gifting and/or philanthropic goals.
Revisit Estate Plans
Business owners who are contemplating a sale in the near to mid-term can enhance their preparation by revisiting existing estate plans. Estate Planning Attorney Lynwood VandenBosch with Foster Swift Collins & Smith PC advises,
“In this context, updating an estate plan involves more than updating a will or trust. A business exit needs to fit within the broader context of a business owner’s personal objectives, both during life and after death. Properly structured, the estate plan creates an efficient, effective pathway for fulfillment of many of the most important of these objectives, and both affects and is affected by every aspect of the exit process.”
The Biden Administration’s proposals to reduce the lifetime gifting exemption, increase the top rate for estate taxes, and possibly eliminate the step-up in basis for inherited property, elevate the priority for business owners to re-assess their estate plans. With uncertainty around the timing of potential policy changes, business owners are giving more thought to accelerating their exit plans to take advantage of the current tax regime before it is replaced. Additionally, many attorneys are exploring creative strategies with business owners to hedge the concern of a change in tax policy implemented retroactively to the beginning of the year.
Execution and Philanthropic Considerations
For many business owners, once financial plans are established to provide financial security and accomplish wealth transfer goals within the family, looking outward with a philanthropic lens provides a sense of meaning and purpose.
Jamie Kuiper, President of National Christian Foundation’s West Michigan region, highlights the importance of proactive planning,
“Early planning may allow business owners to increase their charitable giving by as much as 25%. This is not just great news for the business owner; it is great news for the causes they care about. However, once the sale is complete, these unique planning opportunities are generally lost, so advance planning is critical.”
Donor Advised Funds are a popular tax-advantaged vehicle for giving, which provide the donor control over the direction of the donated funds. This process allows for shares to be donated just prior to a sale of the business which creates an income tax deduction for the donor based on the fair market value of the gift and reduces the capital gains tax liability at the time of a sale. Other planning options also exist, such as Charitable Remainder Unitrusts and Charitable Lead Annuity Trusts, which is why it is important to discuss optimal solutions with your attorney, CPA, and other advisors ahead of a sale to determine the optimal design and timing for your circumstances.
Proactive estate planning ahead of a sale ensures you can structure your exit and estate plans to achieve your goals in the most tax-advantaged way.