Trust Estate

Looming Tax Hikes, Pandemic Accelerate Family Business Transfers

Tom Burroughes, Group Editor, September 23, 2021


The twin forces of fear over mortality and the threat of higher taxes on wealthy Americans have sharpened conversations and accelerated transfer plans. We speak to a firm that recently chartered just how fast conversations are now happening.

The threat of US tax hikes to capital gains, income and estates, combined with the impact of the pandemic, is speeding up families’ conversations about transferring businesses to the next generation, a wealth management firm says. 

A recent study by Clarfeld | Citizens Private Wealth, based on a sample of business owners with net worth of $2 million to $10 million and investible assets of $5 million-plus, found that 70 per cent of respondents planned leadership changes because of the pandemic. In fact, 34 per cent of respondents decided to retire early and 35 per cent sped up their succession plans. A clear majority, 88 per cent, planned to leave their businesses to a family member, including spouses, children and grandchildren.

Sales and transfers of businesses are accelerating. Also, the market is seeing more cases of families hooking up with private equity. There are some cases of family firms being sold to private equity sooner than expected, Joannie Bozek, director of Trust Services and chief fiduciary officer at Clarfeld, told Family Wealth Report in an interview. (Clarfield is the side of the business handling the private client, advisory affairs for UHNW individuals and C-suite executives. This part of the business works with Citizens’ Commercial Banking business, which handles commercial management, investments, lending and M&A advisory and support.)

Tax hike concerns have also prompted owners to speed up their plans, she said. “People are looking at more politically neutral areas because of the climate of politics.”

One surprise in the survey was that one in five family members who hadn’t been interested in taking over a business from their parents subsequently changed their minds. “Family business is alive and well – that’s a good thing,” Bozek continued. 

The Democrats’ plans for personal taxation would take the top rate back to its pre-2017 level - from 37 per cent to 39.6 per cent. This would apply to taxable income above $400,000 for individuals and $450,000 for married couples. Lawmakers also want to raise capital gains to 25 per cent for those with incomes above $400,000, up from 20 per cent at the moment. An additional 3 per cent surcharge would be imposed on taxable income in excess of $5 million. It has been noticed that the legislation does not include a provision for taxing unrealized capital gains on inherited assets, or what is called the step-up in basis. That change had been worrying wealth advisors. The Biden administration also wants to increase the corporate tax rate to 26.5 per cent from 21 per cent, partly reversing Trump’s cut from 35 per cent, when it had been one of the highest rates in the world. 

Wealth managers have discussed with FWR how HNW clients can mitigate the impact of some of these changes, although in some cases, trying to forestall CGT increases, for instance, could be stymied because the hike will be made retroactive. A concern has been how some changes could have hit family-run firms.

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