Jere Doyle, tax and estate planning strategist at BNY Mellon Wealth Management, appears on Wealth! to discuss how business owners can best navigate estate planning.
Doyle stresses the importance of succession planning to ensure a smooth transition in the event of retirement or sale. He explains that in the case of family-run businesses, “the big issue is making sure that if the child takes over, they actually have the capacity to run the business. If they don’t, a lot of businesses will look to bring in an external professional administrator.”
On the tax side, Doyle says, “You need to think about the fact that your deductions are going to be reduced. Some people may want to use their deductions now, before they are reduced, to be in a position to pass some or all of their business on to the next generation. We’ve been telling people for years now that if you don’t use your deductions, you lose them.”
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This post was written by Melanie Leal
Video Transcript
Being your own boss isn’t always what you expect. Believe it or not, business owners face many challenges.
Not only do you need a strategy for managing your personal finances, but you also need to consider what your business will look like in the long term.
Joining us to talk about stressors and tips for navigating state planning is Jerry Doyle, wealth tax and estate planning strategist at BNY.
Thank you for joining us today.
Okay.
So as people are thinking about what small business they want to start, what industry they want to go into and get their name out there, how should they be thinking about their own business plan that will also best suit their state’s plan, or should they be thinking about their overall succession plan of who is going to take over the business if they decide to retire?
Another thing they have to be aware of is that there are valuation issues with state planning for the business and there are also issues such as tax considerations that have to be addressed.
For example, if you want to sell your business, you will have to pay income tax.
If you want to inherit your business while you are still alive, you may have children.
There is the issue of gift tax.
And if you die with the business, there are all the issues of assessments, state planning, state taxes, people have to deal with.
To deal with all of this, you will need to assemble a team of lawyers, CPAs, insurance advisors, asset advisors, appraisers, and more.
And most importantly, plan ahead.
Well, as you grow your business, you will eventually have scraps so have a plan in mind.
You know, I’ve heard this argument in the past from other strategists and people who have implemented parts of this plan in small businesses that you should hire family members and have them on your payroll because of the tax benefits.
On your side, how often does this much-discussed topic come up in conversation?
And often times people want to get their kids involved, but this gets complicated because kids may not be competent to handle business.
Often times, the parents, the first generation, have experience growing a business and know the business well, and the children assume they are capable of running the business simply because they are relatives.
And that’s not necessarily the case. Maybe what people want is to get their kids involved early on, get them going up the learning curve, stop them at a lower level, gradually ease them into the business so that they can take over at some point.
But I think the big issue is that if your child takes over the business, you need to make sure they actually have the ability to run the business, and if they don’t, a lot of companies want to outsource and hire a professional manager.
External professional management.
Jerry, there will be a key time frame, or at least an event, coming up in the near future when the 2017 tax changes are finalized that people will need to think about.
So what do they need to know?
Well, I think the big thing about the upcoming tax law changes is that the estate and gift tax exemption will be reduced from the current $13.61 million to probably around $77.5 million.
And now many are wondering whether they should take advantage of the increased exemption amount.
The tax exemption currently amounts to roughly $14 million, but is set to expire at the end of 2020.
And we’ve been telling people that they have to think about the fact that the exemption amount is going to be reduced, and that they may want to be in a position to take advantage of the exemption amount now to pass some or all of their business on to the next generation before the exemption amount is reduced to the roughly $7 million that we just talked about.
And we’ve been telling people for the last few years, “Use it or lose it.”
The problem is, in 2012, the same problem was occurring.
The exemption amount was to be reduced from about $5 million to $1 million.
That didn’t happen.
Many people made gifts, but because their tax exemption was not reduced, they had donor remorse and wanted to return the gift, but couldn’t because it was irrevocable.
So, as a result, people are looking back on it now and saying, well, maybe we’d be better off waiting until next year, 2025, to see what happens before we pull the trigger and make a decision.
That may be bad advice, because next year everyone might be trying to do the exact same thing.
Lawyers and appraisers are all very busy and may not have the time to do the work for you.
There is another thing people need to worry about.
Many privately held companies are what are called flow-through entities.
The income flows from them to their businesses and onto their personal income tax returns.
And what they have to worry about now is there’s a 20% deduction called the Section 199 A deduction.
This credit would be eliminated if it actually expired, resulting in flow-through entities being taxed at a higher rate than regular C corporations, which have a maximum tax rate of 21%.
So there’s going to be a big disparity between closely held companies and how they’re taxed and the typical large publicly traded C-corporation companies.
Jared Doyle, Wealth Tax and Estate Planning Strategist at BNY Who is Jerry?
Thank you so much for your time today.
thank you.
surely.
