The recession took its toll on businesses of all sizes, and the impact went beyond dwindling cash flow. Small-business succession plans—and their role in personal estate plans—have also been affected, and you may need to revisit your blueprint for leaving the company and make adjustments to address a changed economic landscape. But you might also find ways to turn the downturn to your advantage.
A succession plan maps out guidelines for when you’re ready to call it quits. You may intend to hand over the reins to one or more new leaders gradually, staying on for awhile as an advisor, or you could plan to get out altogether. The plan may be to have a family member succeed you, or you could promote another company employee or sell to an outside group.
 One crucial element of any succession plan is a buy-sell agreement that establishes how the value of the business will be determined when you leave. But in the wake of the economic downturn, your company may well be worth less than it was a few years ago. If you’re counting on proceeds from a sale to fund your retirement, you could decide to delay your exit until the company’s value rebounds, or you might need to look for other income sources, perhaps from part-time consulting for other businesses that could supplement the sale proceeds.
If you’re transferring all or part of the business to family members, however, a decline in its value could be helpful. Assuming the company profits from the economic rebound, shares you give away now should be worth more later, maximizing the impact of current tax-free gifts.
Suppose you and your spouse have equal interests in a business that was worth $5 million in 2007 but is now valued at $3 million. Each of you is entitled to a $1 million lifetime gift-tax exemption, and you might use the combined amount now to transfer two-thirds of the business to your heirs. Before the recession, a $2 million transfer would have left $3 million that could be subject to estate tax. Each spouse can also transfer an additional $13,000 annually to each heir, so this can add up if there are multiple beneficiaries.
Other estate planning techniques can capitalize on a business’s temporarily reduced value. For example, an intentionally defective grantor trust (IDGT) can effectively freeze the value of shares at current levels. Or, with a grantor retained annuity trust (GRAT), the assumed value of a future gift to your heirs will be reduced not only by the low current value of the business but also by today’s rock-bottom interest rates. That could limit or eliminate your gift-tax liability. We can work with you and your attorney to evaluate your succession plan and consider whether these or other techniques and strategies could be financially advantageous. |