Estate Planning Success
for Business Owners
Summary of Content
TABLE OF CONTENTS
Step 1: Understand Your Unique Issues and Opportunities as a Business Owner Step 2: Consider All Your Options Regarding Your Business’ Future Step 3: Determine the Best Strategy to Transfer Business Interests to Family Members Step 4: Include Your Retirement Plan, 401(k) and IRAs in Your Estate Plan Step 5: Make the World a Better Place by Leaving a Charitable Legacy Step 6: Control the Distribution of Your Assets After Death With a Will or Living Trust
Step 7: Staying in Control of Your Business and Your Assets if You Become Incapacitated Step 8: Discover How to Pay Zero Estate Tax
ABOUT THE AUTHORS
Mark L. James, M.B.A., J.D., LL.M. (Tax) has over seventeen years of experience in Estate Planning. Prior to practicing law he was a Planned Giving Representative for an international charity and raised over $2 million using charitable planning strategies. He has conducted over 1,000 estate planning interviews, workshops and seminars. Professor James Bechtel, M.B.A., C.P.A. is a Professor at the Regent University Graduate School of Business, Washington, D.C. campus. He was a senior management consultant and a CPA at Price Waterhouse & Co. With Morgan Stanley & Co. he worked on strategic planning and special situations. He has advised clients in diverse industries, including consumer products, ﬁnancial services, natural resources, technology, real estate and manufacturing.
OVERVIEW OF CONTENTS
Step 1: Understand Your Unique Issues and Opportunities
Business Succession and Estate Planning • Business Losses • Business and Estate Planning Advisors • Business Succession Planning Grid • Gift and Sales Options for Your Business
THIS BOOK SHOWS YOU HOW TO MAXIMIZE the value of family wealth that is transferred to your family members while minimizing losses to taxes and other expenses. There are two additional aspects of business succession and estate planning, however, that you should be aware of. They are transferring your values to the next generation and preparing your heirs to receive your business and wealth from you. A great way to prepare your children for both aspects is to involve them in some fashion in the estate design process. Family involvement is even more critical when there is a business in the family. Therefore, you may ﬁnd it beneﬁcial to give this book to other family members to read. This chapter reviews every major option regarding the future of your business. It also covers the business succession and estate planning process. By reviewing the exhibits and decision-making grids, we hope that you are encouraged and motivated to begin the process. As you embark on the development of your business succession and estate plan, remember some principles we have discussed in this ﬁrst step of the process. The business and wealth transfer planning grid summarizes the essence of the process for (Continued on Page 2)
transferring ownership, control and management of your business to a future generation of successors. The simple grid framework consists of two times (lifetime or after death), two strategies (gifts or sales), two recipients (intended beneﬁciaries or third parties) and two results (gains from good plans or losses from inaction). You must decide when and how your business and other wealth will be transferred to your beneﬁciaries. Generally, the answer to “Who?” provides important implications about when and how your business and estate should be transferred. The best gains are realized by developing a thoughtful wealth transfer plan and beginning to implement it during your lifetime. Deﬁning and writing your goals guides the planning and implementation processes. When major life or business events occur, consider reviewing your plans to see if they should be revised. If you fail to act, your beneﬁciaries will take their chances with some ugly outcomes that can destroy the business and wealth you have spent your life accumulating. Failing to plan is planning to fail. Don’t make this mistake. Like many worthwhile activities, business succession and estate planning is a process and not an event. The process begins by retaining professional advisors with experience. Your preparation in deﬁning goals and assembling other important advisors, such as an accountant and life insurance agent, will ensure a smooth process.
your attorney and your accountant to conﬁrm that your current legal form best serves the future of your business. The value of your business is also critically important. The services of a qualiﬁed professional business valuation expert should be engaged. You will need to have a good estimate of the fair market value of your business for tax, sales and family reasons. Life insurance is another area that every business owner needs to address. If you decided that the best strategy for your business is to sell it, you have a number of alternatives. You can sell it to all your employees, senior management or to an outside third party. In Section 3, we will explore your options when you have decided to retain your business in your family.
Step 3: Determine the Best Strategy to Transfer Business Interests to Your Family Members
Family Business Successors • Transferring Your Business Through Your Estate Plan • Transferring Business Interests Using Gifts • Transferring Business Interests Through a Family Limited Partnership • Transferring Business Interests by Sale • Buy-Sell Agreements
IN STEP 2, we discussed business succession and estate planning issues that concern every business. We also reviewed options to sell your business. In Step 3, we review issues important to those who have decided to retain the business in the family. Just as estate planning is a process and not an event, business succession is even more of a process. The more time available to work through the business succession process, the better the plan will be. Three objectives usually appear near the top of the list of goals of business owners who desire to keep their businesses in the family. The ﬁrst is to retain an interest in the business during lifetime to make key decisions. The second goal is to provide sufﬁcient income for the business owner and his or her spouse in retirement years. The ﬁnal goal is to facilitate wealth transfers to family, charity and other beneﬁciaries at maximum value and lowest losses to taxes. This chapter explores how you can balance and achieve the best possible results for these three objectives as part of a well-crafted plan for your business and other assets. As you begin to develop your business succession and estate plan, remember the principles we have discussed in this step of the process. Some of the most important decisions you will make involve the transitions to new management and ownership of your business after you depart. Making critical distinctions about who ﬁts and who doesn’t in the future of your business will be crucial
Step 2: Consider All Your Options Regarding Your Business’ Future
Organizing for Best Business Succession Results • Business Valuation • Liquidity and the Role of Life Insurance in Your Business Succession and Estate Plan • Selling Your Business
REGARDLESS OF YOUR PLANS FOR THE FUTURE of your business, there are a number of issues that must be considered. In this chapter, we will explore the basic legal forms of business organizations and review the respective advantages and disadvantages of each in light of your business succession goals. Business valuation is also an important topic. Not only is determining the fair market value of your company important for planning purposes, but also discounting that value is beneﬁcial for tax savings. Liquidity and the need for cash is discussed, and the sources of ready cash are explained. Lastly, you may desire to sell your business now and avoid a lengthy business succession planning process. If you are considering selling now, you will be interested to read how to sell to either your employees, your senior managers or to an outside third party. Although every closely held business is unique, when it comes to business succession planning, there are a few principles that apply to every business. One such principle is the importance of selecting the best form of legal entity for your business. Be sure to revisit this subject with both
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Summary of Content
to maintaining business value and achieving important goals for all beneﬁciaries. Aiming for fair allocation of your total wealth, rather than equal shares of business ownership, is the wisest approach to avoid causing conﬂicts in the next generation of owners. We also learned how you can gradually gift ownership interest in the value of your business without any current taxes. Gifting also permits your beneﬁciaries to defer taxes on any gains in value in the business indeﬁnitely, as long as they continue to hold those interests. Furthermore, under the right conditions, the tax regulations even permit a valuation discount on ownership interests you transfer, or, in some circumstances, the interests you retain in your estate at death. Lastly, we reviewed the beneﬁts of family limited partnerships, installment sales and buy-sell agreements.
ment plan beneﬁts, distribution during both lifetime and after death should be carefully considered.
Step 5: Make the World a Better Place by Leaving a Charitable Legacy
Income Tax Beneﬁts of Charitable Gifts • Charitable Remainder Trusts • Pooled Income Funds • Foundations • DonorAdvised Funds
ACCORDING TO “GIVING USA: THE ANNUAL REPORT ON PHILANTHROPY,” Americans gave $248 billion to charities in 2004. Lifetime gifts by individuals totaled approximately $188 billion, and gifts by Foundations represented about $29 billion. That means that 75% of philanthropy came from individuals, a remarkable testament to the generosity of Americans. This chapter covers some of the basic rules and plans available to you. Some researchers predict that over the next 35 years, as much as $41 trillion will be transferred from the parents of baby boomers to their children. Charitable giving will play an immense role in this transfer of wealth. Although charitable estate planning provides many personal and tax beneﬁts, it has a more fundamental beneﬁt in that it puts the control of how to help society in the hands of the donor. With proper planning, individuals can direct money that would have been taken from them in the form of income taxes, capital gains taxes or gift and estate taxes to a charitable cause that has special meaning to them. This chapter provides a broad framework within which to consider charitable gifts. The material regarding charitable estate planning is one of the most important chapters of this book. Although we have considered the legal and technical aspects, such as what is a gift and what is a charity, the more important consideration is transferring your values to succeeding generations. Charitable giving allows you to leave a legacy of giving to those you love, as well as ﬁnancial beneﬁts to those organizations you care about.
Step 4: Include Your Retirement Plan, 401(k) and IRAs in Your Estate Plan
Incapacity and Guardianship Power of Attorney • Healthcare Power of Attorney • Living Will • Medicaid Planning for Nursing Home Costs • Long-Term Care Insurance • Special Needs Trusts
AS A BUSINESS OWNER, your retirement plan, 401(k) or Individual Retirement Account (IRA) may be your largest investment after your business. It is ironic that the main cause for the growth in these plans — income tax deferral — is also the main cause of confusion concerning estate planning for retirement plans, 401(k)s and IRAs. The rules and regulations relating to retirement plans are complex. The Employee Retirement Income Security Act of 1974 (ERISA) is the federal law covering pensions and other retirement programs. In addition to retirement plans governed by ERISA, there are traditional IRAs, Roth IRAs and 401(k) plans, among others. In order to successfully integrate your retirement plans into your estate plan, you must review your plan as well as your beneﬁciary designations. A comprehensive review should be undertaken at least annually, or more frequently, when there is a change in either the law or your ﬁnancial status. Many people forget to consider retirement plans and IRAs when planning their estates. The importance of coordinating the beneﬁciary designation on your retirement plans and IRAs with your estate plan cannot be overstated. As this chapter demonstrates, it is important to discuss these concepts and strategies with your estate planning team to help assess your situation and goals. Together, your team can work with you to develop a longterm plan that will accomplish your goals and dreams. In addition, with the number of taxes involved with retire-
Step 6: Control the Distribution of All Your Assets After Death With a Will or Living Trust
Three Forms of Joint Ownership • Nonprobate Assets • The Beneﬁts of Wills • Choosing Your Executor • Introduction to Trusts
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Estate Planning Success for Business Owners
IT IS HUMAN NATURE to avoid tasks that are confusing and seem complex, especially where money and family are involved. Plus, there are a lot of things we would rather do — clean out closets, weed the garden and repaint the living room (!) — than give serious thought to what will happen to our business and our estate after we die. Still, reality exists, time marches on and we must do our best with that over which we can exercise some control. In this chapter, we will discuss the basics of how your assets pass to others upon death. We will then discover how you can control this process by using a will or living trust. The living trust is a versatile and beneﬁcial estate planning document that should be considered by most business owners establishing their estate plans. In particular, the living trust should be considered by business owners who: • Own real estate outside their home states; • Own multiple properties; • Have estates over $1,500,000 requiring federal estate tax planning; • Feel that there is a potential for family conﬂict within their families after their death; or, • Desire to beneﬁt from one of the primary beneﬁts of living trusts covered in this chapter. As you can see, probate avoidance is not the only reason to give the living trust serious consideration. Avoiding the costs and hassles of probate is only one of many beneﬁts that this estate planning tool can provide.
helpful plans in case of the incapacity of a family member, whether a child (adult or minor) that is disabled or one of your parents who is in a nursing home or has other needs. Planning for possible incapacity involves maintaining the ﬁnancial well-being of the incapacitated person as well as planning for his or her personal care. Failure to make any plans to deal with incapacity could result in a court-appointed guardian managing your affairs. Few business owners would want a complete stranger handling their affairs. Guardianship can be avoided through careful planning. There are many considerations to staying in control of your assets as you age and as you move through the seasons of life. Hopefully this chapter has persuaded you that it is important to plan for possible incapacity.
Step 8: Discover How to Pay Zero Estate Tax
Who Must Pay the Federal Estate Tax? • Estate Tax Rates • Estate Tax Deductions and Credits • An Overview of the Gift Tax • Key Strategies to Pay Zero Estate Tax
IN JUNE 7, 2001, PRESIDENT BUSH SIGNED INTO LAW THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001, known as the Tax Relief Act of 2001. This law signiﬁcantly revised the federal estate and gift tax laws. The new law increased the amount that can be left to heirs free of estate tax to $1,500,000 for the years 2004 and 2005, with a graduated exclusion scale reaching $3,500,000 for estate tax purposes in 2009. There is an interesting “sunset” provision contained in this law, however, that makes the entire law expire on December 31, 2010. Of course, new legislation could extend the repeal date, but unless a new law is enacted by December 31, 2010, the estate and gift tax law will revert to that which was in existence prior to the Tax Relief Act of 2001, which would lower the exclusion amount from the tax to only $1,000,000. Although the federal estate tax has a rate as high as 47% on estates over $1,500,000 (in 2005), we have seen fundamental strategies that can be used to minimize the effects of this tax. More planning opportunities are available to those who are married, although single taxpayers have a number of planning strategies as well. To learn more about this and other titles, contact:
Step 7: Staying in Control of Your Business and Your Assets if You Become Incapacitated
Management by Power of Attorney • Healthcare Power of Attorney • The Living Will • Planning for Nursing Home Costs • Long-Term Care Insurance • Trusts for Family Members With Disabilities
EVERY BUSINESS OWNER, especially as he or she approaches midlife (or when suddenly realizing that he or she qualiﬁes for a senior citizen discount), wonders what will happen if he or she were to become incapacitated, either short term or long term. A heart attack, a stroke, a battle with cancer or simply slipping on an icy sidewalk can change your life in ways we really don’t like to think about: Will I have to move in with my children? What if I have no children or what if they live far away and cannot help? What if I’m already caring for an ill spouse or elderly parent … I can’t afford to get sick! While the natural tendency is to avoid topics that make us uncomfortable, doing whatever possible now, while in good health, to prepare for the future is reassuring. This chapter describes planning strategies to address the concerns that arise in the event you do become incapacitated. This chapter also covers
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Summary of Content