Estate Planning and Business Transition Considerations for Year-End Preparations

Schwabe, Williamson & Wyatt PC

As we enter the homestretch of 2023, it’s the perfect time to reexamine plans and action items. There are plenty of items to address, and it’s best to do so sooner rather than later. When you review year-end estate planning or business transition concerns, you have many worthwhile considerations, ranging from year-end gift-giving to tax issues.

Below is a list of items you might want to consider as you plan for the end of the year and future transitions.

Year-End Gift Giving
Estate Planning
Year-End Charitable Giving
Year-End Planning For Income Tax Issues
Business Transition Planning

Year-End Gift Giving

Federal gift tax exemptions are at an all-time high. These are use-it-or-lose-it exemptions that have year-end implications. Now is also the time to take advantage of valuation discounts available to closely held business interests. Assets to consider for 2023 gifting include:

  • Marketable securities
  • Business interests, which include outright gifting and the use of family businesses and other entities to remove future appreciation from taxable estates. These entities currently qualify for valuation discounts, which offer great opportunities to leverage your estate and gift tax exemptions. These valuation discounts could be at risk if certain tax changes occur. See Schwabe’s Op-Ed: Potential Tax Changes May Increase Cost of Passing Family Businesses).
  • Charitable gifts
  • Appreciated long-term capital assets

Keep in mind that it takes time to analyze, consider, and plan for lifetime gifts, especially large lifetime ones, so the sooner you start the process of planning for gifts, the better. For more on creating a legacy through lifetime gifting, see Commentary: Creating a Legacy Through Lifetime Gifting, published by Capital Press. Getting an early start is especially critical if you are contemplating gifts that must be made by year’s end.

Estate Planning

Year-end estate planning entails several potential concerns, including estate and gift-tax planning rollbacks, potential tax reform, and whether your current estate plan could use a tune-up.

  • Estate and Gift Tax Exemption Rollbacks: The current federal estate and gift-tax exemption amount for 2023 is $12.92 million per person. This exemption is temporary and, absent legislative change, is scheduled to roll back to the level set by prior federal law in 2026. After rollback, the exemption will be $5 million in 2012 dollars, adjusted for inflation—less than one-half of the current maximum.
  • Gifts: Given the expected reduction in the estate and gift-tax exemption, we encourage you to confer with estate planning attorneys and other professional advisors of your choice to discuss whether a lifetime gift makes sense for your family. It is vital to engage in these discussions sooner rather than later: You shouldn’t wait, because the window for making large gifts may be closing!
  • Check Your Plan: The end of the year is always a good time to review your estate plan and ponder whether it could use revision. For more, see When to Tune Up Your Estate Plan and Four Critical Steps to Estate Planning During Uncertain Times. For business owners, this type of planning is especially critical. See Succession Planning vs. Estate Planning – Why They Are Both Important.
  • Clients who own natural-resource property essential to their farming, forestry, or fishing business may benefit from a new Oregon estate-tax exemption. Families in these industries should review their estate and business succession plans to determine whether this exemption can benefit them. For more, see Oregon’s New Estate Tax Exemption for Family Businesses Engaged in Farming, Forestry, or Fishing Business.

Year-End Charitable Giving

You have many opportunities to make substantial charitable gifts that reduce taxes. If you are planning on making charitable gifts before year’s end, consider our Tips for Planning Charitable Giving.

Year-End Planning For Income Tax Issues

Due to the uncertainty of future tax situations, before 2024 individuals and business owners should discuss with tax and estate planning professionals of their choosing the timing and effect of possible changes to:

  • Individual income tax rates—state and federal
  • Carryback losses
  • Basis or cost
  • C corporation losses
  • Corporate income tax rates—state and federal
  • 1031 Exchanges
  • Capital gain rates
  • Suspension of required minimum distributions for qualified retirement plan accounts

Business Transition Planning

Businesses and their owners emerged from the pandemic in a mixed state. Some deferred exit planning as workforce challenges, rising costs, and declining valuations tightened budgets and persuaded owners to focus on steering their firm through rough waters. Other executives used the pandemic to reposition and grow, or in some cases, accelerate retirement. Nationally, although about 53% of businesses hope to go to market, approximately 83% of them either lack a transition plan or their plan has not been documented and communicated. Despite challenging market conditions, now is the time to design a successful future transition.

Healthy companies looking to execute transition plans in the near term have sale opportunities. Although mergers and acquisitions slowed in 2023, businesses with strong financial positions or unique market opportunities remain attractive for both strategic and financial buyers. Private equity interests still have substantial un-invested capital ready for deployment and have actively pursued add-on acquisitions of middle-market companies for their portfolios. Many strategic buyers enjoy strong cash positions and are looking to expand by acquisition. The deal-making environment is expected to be relatively stable until 2025, when current tax cuts may expire. This presents a runway to go to market for owners who would like to sell in the next 17 months.

Deals are occurring at a slower pace, though, with greater focus on due diligence. Sellers prepared to perform extensive due diligence and exercise patience are more likely to close successful transactions. Taxes may pressure transactions and will have to be analyzed from the perspective of the company, the owners personally, and the buyer. The structure of the transaction often depends heavily on the tax implications, including income, state, and estate taxes. Advanced planning, including estate and gift planning, will be vital.

Succession plans that involve key employees are attractive for many private companies, but labor market challenges continue to make it difficult to find and retain top talent with ownership potential. Companies armed with a written transition plan will be better prepared to seize attractive third-party opportunities that arise, and are more likely to have successful internal transitions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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