Planning to Transition Your Business to Your Kids? Believe It or Not—Now May Be the Time to Act

by Scott Danger, CPA, CVA, and Andrew Brower, MBA, ASA

To paraphrase the great Albert Einstein: Every crisis presents an opportunity. This is easy to forget in the face of dire headlines, decreased revenues, and unending uncertainty. But it continues to ring true. For business owners, the economic downturn caused by COVID-19 could present valuable opportunities for business succession, particularly for family businesses.

If you’re a family business owner who intends to gift shares of your business to the next generation as part of your estate plan, now may be the time to act. Here’s why.

The value of your business may be depressed.

No one knows what the economy will look like in two, four, or six months. At the present moment, however, we can safely say that many business values are likely diminished from what they were at the end of 2019. When assets drop in value but are expected to rebound, opportunity exists.

In the case of gifting shares of your business, doing so now—while the value of your business may be depressed—could allow you to gift a larger percentage of your business tax-free. If the value of your business were to appreciate after the gift, and the shares were already in the hands of the next generation, this could create a significant estate tax savings.

The federal estate and gift tax exemption is set to expire in 2025.

The federal estate and gift tax exemption currently stands at $11.58 million—nearly double the amount it was in 2017. This amount represents the total dollars any individual can gift tax-free over the course of his or her life and at death. (The exemption is $23.16 million per couple.)

The exemption doubled in 2018 thanks to the Tax Cuts and Jobs Act (TCJA). Because the exemption is indexed for inflation, it will increase each year and continue to do so until the end of 2025, when the TCJA’s estate tax provisions are set to expire. Depressed business value aside, it’s wise to consider gifting shares sooner rather than later.

Taking into account a lower business value and the $11.58 million exemption, here’s why making a gift now could prove beneficial:

Let’s say your plan was to gift 50% of your business to your children. If your business was valued at $25 million in December 2019, the gift would amount to $12.5 million (without consideration of discounts, to keep the example simple), surpassing the exemption amount. Considering recent events, let’s say your April 2020 business valuation came in at $20 million. This would put your gift at $10 million, allowing you to pass on 50% of your shares—and possibly more—tax-free.

The timing just happens to make sense for you and your family.

None of what we’ve said matters if your family members aren’t in a position to accept the responsibility of ownership, or if you’re not prepared to hand over the reins. The decision to transition your business should never be rushed. Making the gift now—in a bid to take advantage of the current economic situation—should only be done if gifting has been part of your estate plan. And only if you feel the timing is right for all involved.

Consider your options.

If you’d like to explore your options for gifting shares, our team can help. We’ll work closely with you and your attorney to help you understand the value of your business and tax implications of making a gift. To learn more and get started today, click here.

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