If 2020 has taught us anything, it’s that no matter how successful you are or how well you take care of yourself, your financial situation and health are both surprisingly fragile and undeniably intertwined.
Take this time of clarity to fill the gaps in your business succession and estate plans. They involve soul searching and tough decisions, but, alas, those decisions are inevitable. The real question is: How much control do you want over what happens?
Tax Strategies for the Big Exit
Taxes are a critically important factor when it’s time to sell your business. It’s not uncommon for business owners to lose to the IRS more than 40% of the total amount paid for the sale. To avoid this, it’s important to understand the difference between capital gains and ordinary income, the value of YOU and what your personal goodwill has done for the business over the years, how your business stock affects the sale, and what assets might be taxed heavily when sold.
The pandemic—and the financial and economic volatility it has caused—will affect the valuation of your business for years to come, which will, in turn, affect your sale price and taxes, too. How your business weathers the storm and how quickly it bounces back will play an important part. Even if you had a rock-solid exit strategy in place at the turn of the New Year, it’s vital to re-evaluate it in this new light.
Estate Plans and Advance Directives
Focus on the building blocks of a sound estate plan, starting with a will. For closely held family businesses, a will is instrumental in the continuation of the business because it can give executor power to an individual of your choice without unnecessary court involvement. Trusts are part of estate plans, too, because they can help minimize taxes now and when the time comes to pass down assets.
A “little” set of documents often overlooked are advance directives for when you might be incapacitated but not deceased. These documents include a power of attorney, which is critical for business owners. The individual you name as your financial power of attorney will be able to handle certain legal and financial affairs on your behalf—including payroll and tax payments—during any period of time you’re unable to do so. It allows your business to run smoothly when you’re too sick or injured to manage it yourself.
Business owners have a responsibility to their family, business partners, employees, and customers to plan for the inevitable carefully. Don’t wait for the next crisis to make it happen.
Steven Bankler has more than 43 years of experience in the accounting industry. Steven’s expertise lies in consulting, planning, tax, and asset protection as well as exit strategy services for closely held businesses. He also provides litigation support (both as a testifying expert witness and a consulting expert), business negotiations and estate planning. Learn more about Steven Bankler, CPA, Ltd. at www.bankler.com
