Post-Election Family Business Planning

As many businesses have finally begun to re-stabilize after the staggering effects of COVID-19, advisors are now preparing for the upcoming election and potential changes to tax plans and the economy that it may bring. Business owners should be forecasting their estate and liquidity needs, utilizing contingency planning, and capitalizing on digital innovation in order to optimize their workforce.

Excelsior Capital’s founder, Brian Adams, recently spoke with Jonathan Flack, PWC US Family Enterprises and Business Leader, Partner, Private Company Services, to discuss how he’s advising his families and closely held business clients during this climactic time.

A Look at Their Conversation

Current vs. Proposed Tax Plans

Adams began the webinar by reminding listeners that, whether we like it or not, politics are “the reality of how you have to conduct business in this country.” So, while they steered clear of discussing deep political issues, Adams and Flack did touch on the current vs. proposed tax plans of President Trump and Democratic presidential nominee, Joe Biden. Biden has proposed a tax plan that would come with some major implications for business owners. The main points include:

• Raising the corporate income tax from 21% to 28%
• Increasing the top individual tax rate from 37% to 39.6%
• Taxing capital gains and qualified dividends at the individual rate of 39.6% on income above $1 million
• Lowering the gifts and estate tax exemption from $11.6 million to $3.5 million and increasing the tax rate to 70% above that

In contrast, President Trump’s plan currently taxes dividends and capital gains above $1 million at a rate of 20%, and he has instituted an $11.6 million exemption on gifts and estate tax, with a rate of 40% for income above that.

Estate & Liquidity Planning

Because the already fluctuating economy could see another transformation with the potential change in government leadership, business owners should take advantage of the current conditions but also be prepared for a significant change in the future. “A data point that plays to the advantage of family businesses right now is that we are at historically low interest rates,” Flack explained. Excess cash in your business? “Now’s the time to get it out” in order to take advantage of the low dividend rates and avoid possible increases next year. Similar to liquidity transactions, Adams reminded listeners that “it’s really net of fees and net of taxes that is the final number you have to live with.” Additionally, while interest rates are still at such a low level, it is an optimal time to borrow money or refinance any existing loans for your business. On the other hand, if you’ve already maxed out your estate and gift tax exemption, Flack recommends “doing some level of diversification there” between your ordinary income and investment income.

Family Business Risk and Success Factors

The biggest risks to family businesses over the next five years? Flack responded with three main operational points to keep in mind:

1. Being optimized for digital innovation
2. Prioritizing employee health and wellbeing (both physically and mentally)
3. Adopting respectable diversity and inclusion policies

Alternatively, when asked about long-term success factors, Flack advised that families must utilize organized, well-mannered planning and maintain internal team stability. Multigenerational success can only be achieved by “continuously looking at and reevaluating “the plan” for succession of leadership and ownership.” These plans should include a long-term, 50-100 year plan, a 2-7 year strategic plan, and a short-term budget. Addressing all three of these categories will provide transparency and trust across the family.

Adams stated that “it’s not going to be the externalities and investments that sink you. It’s the internal issues and the family culture.” Flack completely agrees that “family businesses are tough.” This is why it’s critical to engage your tax provider, financial planners, and advisors in a collaborative environment that is inclusive of all family members. Gathering everyone at the table together is the easiest way to ease confusion and even provide “a really good opportunity to engage any younger members of the family who may be interested in learning more about the business.” Another option to consider is the implementation of a shared buy-back program, allowing individuals to gracefully exit the business if they wish.

As family businesses navigate the changing of ownership from one generation to the next, it is wise to consider both the portfolio of services and the different trust vehicles available to transfer ownership of shares. Additionally, this pivotal time in history provides an opportunity to discuss potential business restructuring. Any business owners considering selling their business can find resources and advice on PwC’s website.

If you’re interested in hearing the rest of the conversation, you can watch the full webinar here.