When constants are discussed, why do death and taxes always come up? Why not prosperity and relaxation? Well, actually change is the true constant and change is always unsettling.
Planning around and in anticipation of changes requires constant awareness and flexibility. Many business owners “knew” in 2006 that they would transition their business long before 2013 and would be living very comfortably today. We now see those owners that made it through the great recession doing well again although their business, their personal and business debt, their access to credit and the amount they’ve been able to pay themselves and their employees has all changed.
Encouragingly, we are seeing buyer interest for companies whether from private equity or a new generation of leaders. However, the valuations are not what sellers envisioned those few short years ago and now many are seemingly satisfied to go on drawing out strong incomes rather than sell at a value they perceive as inadequate. Yet, in deciding to stay the course, it is critical for owners to ask themselves important questions…What do they ultimately seek? Are there ways to accomplish that result with less risk? What risks like personal health, loss of key employees or customers, increased competition or regulatory changes, are they not fully considering? And, importantly, what comparisons are resulting in their conclusion that a value is “inadequate?”
Sometimes taxes inhibit planning but some good news is that a married couple in Illinois in 2013 can transfer $10.5 million without a federal estate tax (top rate 40%) and $8 million without an Illinois estate tax (top rate 16%). On a less happy note (but at least you’re alive), top federal ordinary income tax rates for 2013 increased to a possible 43.4% and the federal capital gain tax now tops out at 23.8%. Illinois income tax for individuals tops out at 5% but “more fair” proposals are being discussed. Lower income tax payers may not feel impacted by the taxes paid by business owners, but higher taxes impact all employees, vendors, suppliers and, indeed, our overall economy…everyone should keep a hand on their wallet.
Happily, the tax tail alone should not wag the dog. Successful and driven people will find a path and for our clients it will have less focus on an amount of money at a point in time and will be more about navigating a spectrum of opportunities to manage risk and achieve results over a reasonable period of time. There is no “one size fits all”. Employee stock ownership plans are being discussed and understood better by our clients…how principal and interest on ESOP acquisition loans can be deducted, how S corp profits flowing to an ESOP are tax free, and how family involvement and other continuity can be maintained. Phantom stock or other deferred compensation can serve well as a “golden handcuff” and a reward that can facilitate an executive buyout at a later time. An owner seeking to diversify risk might consider a current sale of non-voting shares under an agreement that defines the longer term path to a final transition while maintaining interest in overall growth in value under a phantom stock or other deferred compensation device under which they benefit, with evolving tax and valuation issues baked into the overall plan and agreements. Banks love to fund the transition of solid companies and view a company with a good succession plan far more favorably than those that do not.
The key is to tap into as much perspective and creativity as possible. Unlocking doors we don’t even realize exist may well be the path to well-deserved prosperity and a restful retirement…before, you know, death and taxes.