By Doug Cushing
From the Jordan Ramis Archives
Before the war on Iraq and terrorism began driving budgets back into deficit mode, the President and part of Congress set out to permanently eliminate the Federal Estate Tax. Currently the law eliminates the tax in 2010, but reinstates it in 2011 at the 2001 level. In this scenario the exemption for each estate moves up gradually to $3.5 million — then in 2010 there is no tax; thereafter we revert to 2001 — and a $1 million exemption.
If the estate tax is permanently eliminated (a doubtful result in the view of many experts) does succession planning become irrelevant? In a word, no.
Well-planned ownership transfers will continue to be critical to the ongoing success of business operations, even if there is no tax on the transfer. Deciding how to gradually turn over a family business to the next generation, or more commonly, to a combination of family and key staff, will continue to demand careful analysis and planning. In many cases, trusts, ESOPs, and gifting small ownership percentages will still be desirable to assure successful ownership transition.
Each state provides a system that transfers ownership to the next generation or to a joint owner when a principal dies. But will it recognize special needs for the heir who requires special funding? If your business operation requires a bonding capability, or particular licensing from one or more government agencies, can you trust the legislative decisions to make the right transfer? Don't count on it.
Putting together a business succession plan should allow the business owner to decide who can best run that enterprise. If a relative to whom you will leave your estate can take over the operation, so much the better. One still needs to fine-tune the transfer of effective control. This is essential whatever the form of business entity may be — corporation, LLC, partnership or sole proprietor. To retain a key employee, one must determine how to share ownership, or allow him or her to acquire an interest, while allowing your family to receive the financial rewards of the business you've built. In a sale transfer plan, the income tax effects may shape how the deal is structured, even if estate taxes become less significant.
Once the actual business transfer issues are dealt with, one may still need to deal with an elderly parent needing assistance, a disabled child, special friend, favorite charity, or pet — all situations that the state's transfer scheme realistically will not properly address. The legislature assumes that the direct family members, typically in equally divided shares, are the intended beneficiaries. In today's world of second marriages, blended families, and partnerships of choice, that may be the exception rather than the rule.
Congressional budget and tax battles over the next several years may override previous legislation. No one can predict the effect of future legislation; even if it remains unchanged, it would be difficult at best to plan on dying in 2010 to transfer one's estate with no tax consequences. Whatever the estate tax consequences, business succession planning must remain an owner's concern to assure that the business operations carry on as intended for their family and key employees.