Accounting Articles > Business Continuation Planning:
What is business continuation planning?
Normally a part of an estate plan, business continuation planning is the orderly transition of a business from one generation to the next. Why is this difficult? Taxes.
Let's consider a couple of scenarios.
Let's say that a business owner passes, and that no plan for continuation has been begun, much less put into place. The Internal Revenue Service has guidelines established for the specific way that a business must be valued for estate tax purposes. Trust me, it isn't terribly reasonable. I recently did a valuation on a business that came out at $1,500,000. Both the owner and I had to laugh because there was no way that, in a fair market setting, he would get more than $1,000,000 for it.
In our example, let's say that the entire estate is worth $5,000,000. This number is broken up as follows: $1,500,000 for the business, $500,000 in cash and securities, $200,000 in personal property, and $2,800,000 in real estate. If the estate tax credit at the date of death is $2,000,000, then the estate would pay tax on $3,000,000, roughly $1,650,000 in tax. If the business had been transferred to the next generation prior to the death, then the value of the estate would have only been $3,500,000, and the tax, roughly $825,000.
In the same scenario, if the real estate had been put into a trust as well, then there would have been no estate tax due at all.
Since you want the business to pass on to the next generation anyway, why not do it on your own terms, develop a business continuation strategy and avoid paying estate tax?
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