What will the future bring after the last year or so of frenetic estate and business succession planning? I don’t have any better crystal ball today than I had last year when I was advising clients to play “use it or lose it” with their gift and generation skipping tax credits. However one thing is for sure, estate and gift tax rates have increased to 40%. That means more liquidity will be required to transfer business interest to the next generation. After adding the State inheritance taxes most taxable estates will be taxed at 50% or more. A 50%+ transfer tax would lead me to believe that there will be no significant let up in estate planning.
We have already seen a spurt in activity from those who intended to do something yet did not get around to it and now feel as though they have been given a reprieve from the curse of procrastination by the continuation of the estate tax credits. On a related note, I would anticipate seeing a campaign by the IRS estate auditor to challenge discounting. There may have been some hasty valuations prepared last year, and I have no doubt that if after a few test audits they find a trend, the IRS will recognize low-hanging fruit and begin auditing 2012 gifts with vigor.
Optimistic business owners are using cash and cheap credit to update equipment and facilities that have for the most part have not been addressed for the past five years. There will be recognition that their estates will be vulnerable to the 50%+ estate and inheritance taxes and there will be an appropriate move to cover this liability with life insurance.
There are also those owners who are unwilling to update their equipment and facilities now and are choosing to hold on as long as they can. When they do sell or pass the business to the next generation, these equipment and facility investments will fall on the shoulders of the new owner. Thiswill create more capital expenditure opportunities for business owners which will require more debt and the banks will demand more life insurance to cover the debt.
I see no successful effort for tax reform. In the absence of dynamic leadership, tax reform requires the expenditure of massive amounts of political capital. President Obama has spent all of his political capital on health care and the erosion of his credibility will become evident as the massive cost and compromised care associated with a single payer (government) system is forced on us. Tax reform will be the focus of the next Presidential election as even the liberals will flinch at the cost associated with government run health care. If you thought health care was expensive before, just wait a couple of years and see what the government can do with it. Many business owners will be progressively discouraged by the increasing taxes associated with healthcare which will ultimately be passed along to workers as lower compensation and consumers as higher prices. Those business owners who cannot find a way to maintain their profitability (pass the cost of health care to workers and consumers) will close their businesses. The net result is that we will have fewer businesses with 50 to 500 employees and the unemployment rate will remain well above 6%. Not a pretty picture for the future but the laws of nature (every action has an equal and opposite reaction) forecast that there is going to be some major consequences to government mandated health care.