When change happens: Navigating updates to the tax code, planning for change

At the moment, there is a lot of talk about how possible changes to capital gains tax rates could affect businesses, individuals, and the future of their agency. While the exact details are still unclear, it’s always a good idea to think through different ways to minimize any vulnerabilities to your business. 

Our agency banking team at Westfield Bank continues to monitor the legislation closely and has some guidance to share that, no matter the outcome of the current tax code discussion, will allow you to weigh your options as you plan for the remainder of this year, and beyond.

If selling your business is on your mind, think perpetuation

What’s happening to the tax code, why it matters

You may have heard rumblings that “taxes are going up” – but is this true? The answer is: maybe. But what is the reason for this and why is the answer so unclear, is causing many people to wonder if they should be adjusting their planning, and how?

The reason is simple: as with any law, there is much discussion that must be had before congress, in this case, decides how to proceed. The initial proposal* put forth by the Biden administration was to increase capital gains taxes (or the amount of profit realized by the sale of such items as stocks, bonds, or real estate) – from 20% to 31.8%**.  This plan, along with the overall Economic Recovery plan, is currently working its way through Congress and will likely look much different than what was originally proposed.   This uncertainty is making many businesses feel a sense of urgency – particularly those considering a sale or transfer of ownership. (as the capital gains tax on income earned from the sale could be lower in 2021 than in 2022, resulting in larger earnings overall). 

We only know for certain that we should have some answers shortly, so it is important to follow the conversation.

If selling your agency is on your mind, think perpetuation

Perpetuation is the process of transferring ownership to other generations – a road map of succession planning.  

Very much a longer-term strategy rather than a last-minute decision, some of the most well thought out perpetuation plans are years in the making. Considerations often include selling to an outside party or “perpetuating internally” – meaning selling your agency to the next generation of employees or producers/executives. For example, if the owner of an insurance agency retires, who will take their place? Another agency or perhaps a child that has followed in their parent’s footsteps?

In helping agency owners think through what is right for them, we often think about three things:

  1. What do they want out of the sale of their business?

    a. Do they want to sell to a third-party OR

    b. Would they like the business to continue with their established name, elevating internal and known leadership to ownership?
  2. How much do they want to earn from the sale?

    a. Selling to a third party can sometimes yield more revenue, however -

    b. For some, it is important to sell internally. This may mean taking less from the sale and keeping their name on the door, current staff employed, and continuing their legacy and business growth.
  3. How do they want to be paid?

    a. Cash upfront?

    b. Cash over time?

    c. A mix of both?

As you work through the perpetuation planning process, the goal is to determine what you want for your agency, while achieving it in the most tax preferential way for both you and the future owner. There are several options that either spread out the tax liability (such as distributing the payment for the sale over time) or as might be beneficial at times like these when the tax code might change, selling in one calendar year vs. the next. It all comes down to thinking through what’s most important to you – along with the timeline to get there.

When it comes to taxes and perpetuation, your plan should reflect a host of scenarios and give you different ways to be flexible should things change. Westfield Bank is here to help you determine what is best for you – contact us today to see how we can help you adjust as circumstances change.