As we near the end of the year, we’ve been thinking a lot about all that’s happening in our world: two wars, presidential primaries just weeks away, periodic and predictable wrangling in Congress about the national budget, questions about the potential of artificial intelligence, the teeter-totter of will-there-or-won’t-there be a recession, inflation, and interest rates. We don’t know what 2024 will bring, but we do know that it will bring more of the same: constant change.
Yet, two issues in our world of business transitions continue to be a constant focus: time and taxes. As family business consultants, we know that owners and successors will continue to grow older and while tax rates on income and estates fluctuate, they are here to stay. Owners can acknowledge the risks and opportunities of aging and taxes and start to plan the transition of their businesses, or they can freeze in place.
Aging and the Great Wealth Transfer
There is, justifiably, plenty of buzz about the inevitable “great wealth transfer” as members of The Silent Generation and Baby Boomers die. By 2045, analysts expect that between $60 trillion and $84 trillion in assets will pass to members of Generation X (born between 1965 and 1980) and Millennials (born between 1981 and 1996). The assets that will change hands include real estate, securities, cash, life insurance proceeds and tangible personal property. Of the $84 trillion, $72.6 is anticipated to go directly to heirs and $11.9 million to charities.[1]
The transfer of family business ownership to the next generation is no less inevitable than the transfer of more liquid assets. As transition strategists, we are amazed when owners are proactive in creating plans to transfer their financial assets to heirs yet put off planning the transfer of their businesses to successors.
On the one hand, that’s understandable: Figuring out how to protect your assets from the other inevitability—taxes— is almost a one-step process. Once you determine how much money to leave to your heirs, you meet with an estate planning attorney to choose the proper vehicle to protect the assets. Figuring out how to transfer an active business which financially supports your family and the families of all employees, and whose success may depend on you–its current owner–is not a simple or one-step solution.
Transitioning a business successfully to the next generation of owners typically takes time. And time does not stop for owners or for their successors who can grow tired of waiting for the baton to be passed.
As time passes, it also eats away at the time owners and successors can spend working together. That’s really unfortunate because so many owners and successors—especially in family businesses—tell us that working side by side was one of the most gratifying experiences of their lives.
Is there Any Upside to a Recession?
We aren’t in the business of making predictions, but we are in the business of helping owners tackle their “What Ifs.” So, let’s talk about one of them: What if there’s a recession? During recessions, the value of most businesses falls. That’s not a good thing for owners who need to squeeze out every dime to support the next phase of their lives. And yet, a lower enterprise value can make it more affordable for successors to buy in. A lower value can also make it possible for owners to gift a larger percentage of a company’s value. Finally, a lower value can mean a smaller tax bill.
Tax Considerations and the 2025 Deadline
Unless Congress acts to grant taxpayers a reprieve, the tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) will expire at the end of 2025. Among other changes, that means the individual income tax rates will revert to their 2017 levels; the cap on the state and local income tax deduction will disappear; and the 20 percent tax deduction taken by many pass-through businesses will be eliminated.
The tax change with the greatest impact on business owners, however, is the reduction of the federal estate tax exemption that takes effect on January 1, 2026. The current exemption of $12.92 million per person and $25.84 million for a married couple shields the assets of most Americans—including many business owners—from taxation. In 2026, assuming the TCJA is allowed to expire, these exemption amounts are scheduled to drop to approximately $7 million per individual and $14 million for a married couple. (The exact amount depends on inflation.)
Our clients, whose businesses, when combined with their other personal assets, are worth more than $7 or $14 million for single or married respectively, are strategically in the process of planning their transitions.
The Value of Long Runways
In our practice, we’ve found that the best way to make time your ally is to give yourself plenty of it to plan your transition. The longer your runway, the more options you have when something doesn’t go as planned. And, in every transition, there’s always something that doesn’t go as planned or anticipated.
Be Brave! Forge Ahead in Your Transition Journey!
The prospect of transitioning your business can be daunting, and we know that there are many What Ifs:
- What if your business isn’t worth enough to fund the post-business life you want?
- What if the person you want as your successor isn’t interested?
- What if your employees don’t like your successor?
- What if your business can’t succeed without you?
- What if there’s a recession: Do you want your successor to have to battle through it? Do you want to battle through it?
- What if, by making one of your children your successor, your other children sever ties with you?
- What if, after leaving your company, you get bored?
Please don’t let the What Ifs take control your internal conversation. Instead, take the initiative and begin creating a plan using The Transition Roadmap™ to transition your business in a way that meets your most important goals. We’re proud that 100 percent of the owners who have used The Transition Roadmap have gone on to meaningful Next Adventures™ and have confidently left their companies in the hands of successors well-prepared to lead it them.
If you are interested in ways you can use time and taxes to your advantage in the transition of your business, let’s talk. Reach out via: info@transitionstrategists.com.
[1] https://www.thestreet.com/dictionary/g/great-wealth-transfer quoting market research from Cerulli Associates https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045
Elizabeth Ledoux is a co-author of the award-winning It’s A Journey: The MUST-HAVE Roadmap to Successful Succession Planning, as well as Accelerate Your Entrepreneurial Flight and Understanding the Growth of the Entrepreneur. She frequently speaks to organizations and business owners about challenges and opportunities in private and family business transitions, business and individual growth, and the business succession journey.
