By Maria Valdez Haubrich
You’ve undoubtedly hear the saying, “Nothing is certain but death and taxes,” but this year, even taxes aren’t so certain. Without Congressional action, the tax cuts that were adopted during the Bush administration are set to expire at the end of the year, USA Today recently reported. But with a presidential election coming up in November, little action is likely to be taken until the election is over—which means personal income taxes, capital gains taxes, payroll taxes, estate taxes and more could all rise.
The operative word there is “could”—but if you own a family business, the estate tax, in particular, could have far-reaching effects. Without intervention, the lifetime limit on the estate tax will drop from $5 million to $1 million beginning in 2013. Any estate over $1 million will be taxed at a maximum rate of 55 percent (up from the current maximum of 35 percent); estates worth more than $10 million will also be hit with a 5 percent surcharge.
Proposals pending in Congress range from eliminating estate taxes entirely to extending the current exemption. President Obama has suggested more of a compromise solution that would set the lifetime limit at $3.5 million and the maximum tax rate at 45 percent. (These were the amounts in place in 2009.)
Without any certainty as to what 2013 holds for estate taxes, how should family businesses prepare? While advice from the experts varies, the overall theme is “Proceed with caution.”
One expert who spoke to Bloomberg Businessweek advised that, for those who were planning to shift their business’s assets to their children eventually, 2012 is probably the best year to do so. At the same time, keep in mind that taxes aren’t the only consideration in making this decision.
If you’re not ready to give up control of your company, making a rash move now simply to save on taxes could come back to haunt you. It’s also important to consider the roles you and your children will play in the business, how to divide up the business assets among family members and whether children will face onerous capital gains taxes should they decide to sell their share.
Of course, if your business is worth less than $1 million, there is no reason for you to make any changes right now. But one move you should make is to start thinking about succession planning—a process many entrepreneurs tend to put off. Have a current valuation of your business done, do some hard thinking about your future and that of your business, and talk to your children and other family members about their wishes and goals. Whether tax changes are looming or not, planning ahead will leave your business—and your family relationships—in better shape than not planning at all.
Image by Flickr user Family Art Studio (Creative Commons)
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