For family business owners, change is in the air as tax cuts expire

Bush-era tax cuts and credits are expected to expire after this year, and business owners should already be making plans to minimize the impact of these changes.This is a particularly important issue for family business owners. Succession planning is one of the most important concerns facing any family business owner, and tax management is an essential element of any family business succession plan. That’s because the impact of taxes affects the value of the company, the owner’s personal wealth and the amount of wealth that can be passed along to the next generation of owners, whether in the form of capital or the business itself.Without additional legislation, the estate applicable exclusion amount will drop from the current $5 million (actually $5.12 million, since it is indexed for inflation) to $1 million (again, indexed for inflation) as of Jan. 1, 2013. The highest estate tax rate reverts to 55 percent from its current 35 percent. The current lifetime (non-charitable) individual gifting allowance of $5 million, unified with the estate tax system, will also change without new legislation.These circumstances have encouraged many family business owners to consider gifting during 2012 to freeze their estate at its existing value, transferring future appreciation to the next generation.Similarly, income tax rates are also scheduled to increase in 2013, when the extension of the Bush tax cuts will expire. The same goes for capital gains tax rates, which will rise, and qualifying dividends also will resume being taxed as ordinary income. To the extent possible, accelerating income and capital gains is another planning opportunity receiving enhanced interest.Clearly, for family business owners, the next several months are important. Owners need to consider what steps taken now can minimize the tax burden they’ll be placing upon themselves in retirement and upon their heirs when they pass the company along.Giving opportunitiesTax management is far from the sole succession-planning concern for family business owners. Another element closely tied to tax management is charitable giving. Successful families often turn to philanthropy to further the family legacy, particularly when new capital is going to be created through the sale of a company. However, strategic philanthropy operates differently than checkbook charity and requires careful planning.Typically, one of three approaches is pursued.The first possible approach to philanthropy is creating an annual gifting budget. Through this approach, owners and their families are able to make charitable contributions from general family assets in a manner that permits them to realize tax benefits beyond the standard charitable deduction.At a time when owners will be losing many of the tax benefits provided by the Bush tax cuts, this approach is attractive.A second approach is to establish a donor-advised fund with an initial irrevocable gift. Donor-advised funds allow owners and their families to maintain a continuous stream of charitable giving that is facilitated by an experienced administrator. Additional capital can be added to the fund over time as resources allow, and the timing of the tax deduction and the charitable distribution can be separated.Finally, owners and their families sometimes create a family foundation. This option is used less now with the increased popularity of donor-advised funds, and is not always the best choice to meet an owner’s charitable intent. A family foundation is also funded with seed capital and expanded as resources permit. An experienced advisor should be consulted on which option best meets a family’s needs.These options are essentially lifetime giving opportunities, though charitable bequests upon death are another option for achieving philanthropic goals. Business owners and former owners have plenty of opportunity to select the right approaches to meet their goals, as well as those of the family as a whole.These dual goals of creating and transferring a lifetime’s wealth to future generations and creating a philanthropic legacy are honorable and a wonderful reflection of a successful career owning and managing a family business. While they are frequently at the forefront of most owners’ thoughts, the impending changes to gifting regulations and tax rates make them more timely than ever.All family business owners, no matter how old or close to retirement, should be working with their financial advisers to revise existing succession plans to assure that these changes don’t have a negative impact on their personal retirement plans, their ability to transfer corporate and personal assets to future generations of the family, and their plans for future charitable endeavors.Certified financial planner Jim Fitts, director, wealth counseling, at Concord-based Harvest Capital, can be reached at Marshall G. Rowe, president and chief investment officer at Harvest Capital, can be reached at