(Tuesday, Oct. 20, 2020; 10:30 PM EST) In America's capitalist system, an economic cycle entails destruction of businesses and their replacement with better businesses. It's survival-of-the-fittest, a process in which the ranks of businesses are periodically thinned by recessions.
The Covid recession, early evidence suggests, is leading to a boom in entrepreneurialism. "The pandemic has had all sorts of unexpected consequences, from a boom in sourdough-bread baking to more people listening to nostalgic music on Spotify," according to The Economist, (October 10, 2020). "Less noticed is a once-in-a-generation surge in startups."
So here's an important strategic tax tip for anyone who just started a business or who's about to do so: Plan now to transfer your ownership to your family.
To be clear, your new business may succeed! Capitalism is dynamic which keeps the American dream alive. Businesses that failed in the Covid crisis are going to spawn the launch of businesses that will succeed and ride the wave of growth in the next economic cycle. If you plan to succeed, and, if your business does indeed boom in the next economic cycle, it is wise to plan now to transfer assets to your children, charities, and what's important to you. You can set up your company tax-efficiently right now to minimize taxes many years from now for your heirs.
The U.S. debt has skyrocketed and estate taxes are expected to be higher in the years ahead. Planning for success of a new business and minimizing taxes on its transfer to the next generation could result in considerable tax savings, especially in the event of a Democratic sweep on November 3. A victory by Democrats is expected to slash the amount of estate assets exempt from estate tax from $11.58 million to $5.75 million, or lower. By forming the company and managing the selection of shareholders with this in mind from the time of initial formation of your company, you will have more control over the tax-efficient transfer of your business if it's successful.
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This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.