2020 Tax and Wealth Planning for Family Business and Office Operators

Frank Graziano Personal Financial Services Leader, PwC US March 09, 2020

Taxes can be complicated. But for family business owners and operators, effectively managing the tax and regulatory landscape in the US is an important part of their business, allowing for smarter succession planning to position company control and family wealth to remain solvent over generations. To help manage this complexity, we recently released our annual 2020 Tax and Wealth Planning Guide for private company leaders.

Our report explores the many facets of the tax and wealth universe, but there are several key takeaways specifically relevant to family business and office operators that are worth noting in detail.

Discounting

‘Discounting’ is a principle that may be of particular importance to individuals in their wealth transfer planning. Discounting refers to the valuation discounts for lack of marketability and/or control that may be applicable when transferring an asset such as privately held company interest or other hard to value assets, to successor generations. When this is done, asset value is removed from the owner’s taxable estate. What’s more, the future business asset appreciation associated with those interests move to the next generation.

However, it is important to note that the IRS had published proposed regulations in this area in the past that would restrict the ability to use discounting for family-controlled assets. The current administration has withdrawn the proposed regulations, meaning the regulations will not be finalized and are not currently in effect. Should there be a change in administration, families should pay close attention as there could be a possibility that a new administration could choose to “dust off” the prior proposed regulations and to possibly pursue this legislation, it may be easier for them to get this done than further reform.

Given the potential for valuation discounts to be limited in the future, families should consider transferring assets now, as it provides strong tax incentives for passing wealth and company ownership down to later generations to help ensure the business can remain within the family.

“Clawback”

In long-awaited guidance, the IRS has confirmed it will not retroactively “claw back” gifts that utilize the increased estate and gift exemption when the increased amount sunsets after 2025. This means families can pass on wealth of around $11.5M per person or $23M per couple to family members – an amount that almost doubled the previous exemption pre-tax reform. This recent guidance is of specific importance to family offices charged with generating wealth today and establishing a pathway to longer term prosperity. Families and family office leaders may now feel more comfortable that there will be no claw back and should consider larger multi-generational gifting as a business strategy based on this recent guidance. Given this guidance and the upcoming elections and chatter on this limit, if there is a change in administration this limit could be reduced prior to 2025 and families should be planning on using the higher amount before they lose it.

Residency Planning

Recent PwC research shows that the market value of M&A deals in 2019 was slightly more than $1.9 trillion, creating the opportunity for large liquidity events for family business owners. These types of events can change the financial situation of a family quickly, and cause business owners to reconsider their current tax strategies.

As income and property tax disparities between states continue to climb, and as one ages, the desire to change one’s domicile to a different state may increase. For Ultra High Net Worth (UHNW) individuals, residency planning can be very complicated but could result in significant tax savings post a liquidity event. That should be kept in mind as a way to save considerable capital. This can be of significant importance to families living in traditionally high tax states such as New York and California, who may consider moving to lower tax states such as Texas and Florida. It is important to note though that a residency change only impacts personal taxes, and that the business taxes of a family organization will still be adherent to the location of the business, not the owner.

Conclusion

As tax professionals and the IRS continue deciphering and interpreting the Tax Cuts and Jobs Act of 2017 and state legislation remains unpredictable, it is becoming increasingly imperative for family business and office owners and operators to remain vigilant in their strategic planning. By carefully considering these changes and trends to their 2020 tax and wealth planning, family business and office owners can better plan that they will turn their family business into a multi-generational success story.

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