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your business are going to be as high right now as they were for the past decade, when most of the integrated producers were trying to become more integrated. • If you embrace the concept of utilizing your current success to invest in the future, then it is likely that your balance sheet will reflect lower cash balances and higher debt balances. • Company valuations are most likely on the rise due to the increased profitability, but remember that valuations are reduced dollar for dollar for increased debt and reduced cash balances. • Also keep in mind that most valuations use an average of a couple of years in the calculations.
how this will play out and whether the changes will be made retroactive to the beginning of the year (yes, they can do this and have done it in the past). What he is proposing for successful business owners is absolutely frightening. The following are a few of the key provisions in his proposal: • Increase in capital gains tax for taxpayers with over $1 million in taxable income from 20% to ordinary income rates (which he proposes to make 39.6%). • Reduce the estate exemption amount to Obama-era levels of $3.5 million ($7 million for a husband and wife). • Eliminate the step-up in basis to fair market value for assets passing through an estate.
Let’s digress from these thoughts and spend a few minutes discussing the current political climate in Washington, D.C. President Joe Biden wants to institute a massive investment in infrastructure and pay for it with increased income and estate taxes. No one knows exactly
So, if you have a company (or own real property or any other investments) that is worth $20 million, instead of being able to pass it to your children tax-free with a full step-up in basis, you now will have an estate tax on $13 million and no step-up in basis. If you
BOXSCORE July/August 2021
sell the company (assuming you have little or no basis), you will incur $8 million in taxes instead of $4 million. If you wish to preserve some or all of the current roughly $23.5 million in estate exemption and the 20% tax rate on capital gains, you may need to move very quickly, because once the new laws are enacted, you will be stuck. While no one knows exactly how this political process will play out, it is a safe bet that tax rates are going up and favorable estate rules will be diminished. So here is what you need to consider in the very near future: • Consider obtaining current appraisals for all of your key assets. The valuation will probably be as low right now as it can be, assuming your business profits are accelerating and you are taking on new debt to pay for equipment and systems. • Meet with your tax and estate planning experts to develop a plan to transfer assets out of your estate in the very near future. A strategy encompassing some combination of gifts, outright sale, installment sale, sale to a defective trust, or transfer to a trust should be drawn up. • Trusts need time to be formed, recapitalizations involving nonvoting stock can take time to effectuate, and deeds on real property often cannot be changed overnight. • Valuation and estate-planning experts are going to be very busy in the near future, and you may not be able to get to them quickly. Significant change is on the way, and if you are going to manage your current success properly, you need to get ahead of all of this and start the process immediately. Mitch Klingher is a partner at Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@ klinghernadler.com.
