Succession Planning for Entrepreneurs Why 2013 May Be Too Late

Entrepreneurs consistently face the difficulty of passing the family business to younger generations. Among the many challenges to successful transitions is the cost of estate, gift and generation-skipping taxes (GST) payable on transfers to family members. As challenging as today's transfer tax environment is, scheduled changes in legislation will make inter-generational transfers even more difficult. Given these impending legislative changes, 2012 presents a potential limited window for individuals to accomplish significant succession planning. Because this planning requires time to consider and implement, it is critical that you begin the process now and consummate the plan before year-end. The reasons for this opportunity include:

The individual gift, estate and GST exemptions are $5.12 million ($10.24 million in aggregate for a married couple), and are scheduled to decrease to $1 million on January 1, 2013. (The GST exemption will be somewhat higher due to inflation indexing.) The top gift, estate and GST tax rate is 35%, scheduled to increase to 55% on January 1, 2013. The August 2012 AFRs (interest rates applicable to inter-family loans and sales) are at historic lows: 0.25% short term; 0.88% midterm; and 2.23% long term. Valuations, upon which wealth transfer planning are based, are below their peak levels. For example, business valuations, while somewhat recovered from 2008-2009 levels, are still considered by many to be relatively low. Similarly, real estate valuations for virtually all commercial property types remain below 2007 peaks. Volatility, risk and uncertainty continue to increase minority interest discounts for lack of control and lack of marketability. As an aside, using high quality appraisers continues to be important in valuing property to be transferred. For example, the Tax Court recently recognized the stature of MAIs (Members of the Appraisal Institute) for real estate valuation...