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Entries in business succession planning (5)

Wednesday
Nov302016

Estate Planning NOW: Preparing for a New Government

Gift Tax, Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

It’s impossible to predict what any future president will do, or what Congress will approve. But in light of comments president-elect Donald J. Trump made on the campaign trail, and given that Grand Old Party members will have a majority in both houses of Congress – certain factors in estate and succession planning should be considered.

Estate Planning for Tax Reform

Trump has promised what he calls A Pro-Growth Tax Plan, designed to reduce taxes for many groups of taxpayers.

In broad strokes, the president-elect has promised lower taxes for businesses and low to middle-income families with children. The plan also promises to close special interest loopholes, repeal estate taxes (which generates a hefty 40 percent in federal income from single taxpayer estates worth $5.45M or more; $10.9M for married couples), and reduce tax brackets down to three from seven, according to Motley Fool.

If we combine Trump's and the GOP's 2015 tax reformation plans, the changes could include the broader goals above, and: 

  • Increase standard deduction amounts from $6.3K to $12K for single tax payers; and $12.6K to $24K for married couples;

  • Eliminate personal exemptions;

  • Cap itemized deductions at $100K (single), $200K (married), which could put a damper on reaping the current benefits of charitable contributions (more information on that below);

  • Repeal AMT (alternative minimum tax);

  • Repeal NIIT (net investment income tax); and

  • Repeal generation-skipping transfer taxes.

Mortgage interest deductions and charitable contribution deductions would remain under the GOP plan, but changes may be imminent.

Estate Planning for a Trump Presidency

We looked at the broader strokes above. But here are some considerations to make for the immediate future.

Trump Tax ReformCharitable Contributions: Make them now, just in case. The GOP opted to keep them, but Trump wants to "disallow" them. Currently, you can deduct up to 50 percent of your adjusted gross income when giving cash – and anything above 50 percent can be carried forward over the next five years.

Death Tax: If the federal estate tax is repealed, those with significant assets may not need to reduce the size of their estates.

Capital Gains: On the other hand, the president-elect's tax plan would levy fees on capital gains at death if they are worth more than $5M (single) or $10M (married).

Business Planning: Now may not be the time to sell business interests. Currently, income generated from those sales is taxed at over 43 percent. But if the Trump tax reformations go into effect, the tax rate could come down to 33 percent.

Again, none of us can predict what will happen should tax reforms be enacted under a Trump presidency. The main things to remember now are that charitable contributions may be worth making in 2016, and that it may be best to hold off on selling businesses for the moment. 

 

Kira S. Masteller is a Shareholder in our Trusts & Estate Planning Practice Group. 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Friday
Aug122016

Game Changer? Succession Planning Targeted by IRS

by Michael Hackman and Kira S. Masteller

Tax Attorney EncinoCertified Tax Law Specialist Trusts & Estate Planning

The Department of the Treasury wants to place limitations on valuation discounts that are currently commonly used to reduce asset values in family-owned and closely-held businesses, in an effort to increase tax revenue. The Treasury released proposed new regulations to that effect last week. If approved, the Regulations would revise Internal Revenue Code Section 2704.

Under current rules, through estate planning, individuals can transfer significant assets to the next generation at discounted values – primarily by transferring fractional interests in real property and businesses. Generally, family relationships are disregarded when determining the fair market value of an asset at the time of transfer.

The fractional interests – let’s say 10 percent limited partner interests in a Family Limited Partnership (FLP) with a net value of $4 million are transferred to each of four children – the interests are characterized as having lack of control and lack of marketability. Such characterizations have allowed appraisers to justify significant, so called minority discounts regarding the fair market value of the  minority interest in a business.

For example, if the FLP interest is appraised at a 25 percent discount, each of these gifts with an underlying value of $400,000 would be valued for estate or gift tax purposes at $300,000.

If the Treasury Department’s proposals are enacted, and this could happen by year end, key trust and estate planning tax-saving vehicles will be less effective, or curtailed altogether. The new Regulations could also affect the terms of an entity’s operating or partnership agreement. 

There is no doubt that if these regulations go into effect, they will be vigorously challenged by estate planning attorneys. While these challenges will be based on a variety of technical arguments, there is no assurance that they will prevent the IRS from taking the proposed action. 

There also is no way to predict how these regulations might affect discount appraisals. The key to obtaining a significant discount is to obtain a proper appraisal that has an additional discount analysis. Appraisers may be less willing to confirm aggressive discount appraisals in light of the proposed regulations. 

In any case, family business and property owners who intend sometime to give or leave their business or property to family members should strongly consider taking advantage of the presently available discounts before the new roadblocks are placed in their way.

 

Michael Hackman is a Certified Specialist in Tax Law, and Chair of our Tax and Trusts & Estate Planning Practice Groups. Kira S. Masteller is a Shareholder in our Trust & Estate Planning Practice Group. 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Wednesday
Jul252012

Business Succession Planning: The Shareholder, Operating or Partnership Agreement

 

by Robert A. Hull

 

For many of us, one of our most valued assets, is our business. What happens when you or one of your business partners becomes disabled, divorces, retires or passes away? Will your business continue to function smoothly?  Will there be infighting between owners or spouses/estates/children of owners?  

Hopefully, you established procedures for some of these scenarios when you started your company. If you didn't, you need a business succession plan. Here's a hypothetical to illustrate why:

You co-own a custom wing-nut company that manufactures state-of-the-art custom wing-nuts for almost any industry that uses this type of fastener, with a partner who is married with three children. You are also married, with three children.

However, you've never gotten along with your partner's spouse, who you think is spoiled, grasping and just plain annoying. Worse, your partner's three kids all embody many of the same negative traits.

To further complicate matters, your own spouse worked from home throughout your own marriage, raising three mostly good kids . . . a great parent, but not in the least bit business minded.

Your kids are a mixed bag. Two work for your company. One is creative – he came up with the brilliant idea of fluorescent wing-nuts which are selling like proverbial hotcakes. The other is financially-minded, the one who ensured you made the biggest profits possible on the project. The third kid just likes to head off to Las Vegas a lot. Frankly, you're a little worried.

Some of the questions you should be asking at this point are:

  1. What happens to your company if your business partner passes away or becomes disabled, divorced or simply wishes to sell his or her share of the business? Will you suddenly be partners with his or her annoying spouse and three, bratty children or with a stranger?

  2. What happens to your own interest and your company if you should become disabled or pass away?

It is crucial that you put into place a plan to address the above scenarios before any of them manifest.

Business succession planning may sound complex, but it's really a lot less difficult than leaving everything up to fate or "crossing those bridges when you come to them." No good comes from kicking the can down the road.

 

The Shareholder/Operating/Partnership Agreement – Defining Intentions and Handling Disputes

 

Business Succession AttorneyA Shareholder Agreement (for a corporation), Operating Agreement (for an LLC), or Partnership Agreement can provide some answers to these questions. 

It will clarify what you and your business partner intend for your company, and can provide guidelines for handling future disagreements. The agreement (sometimes referred to as a “buy-sell” agreement), or in some instances the governing documents of the business itself, should set forth:

  1. The respective ownership interests of the business partners.

  2. The next steps to take when an owner resigns or retires, becomes disabled or dies, or files for personal bankruptcy (e.g., buyout provisions, rights of first refusal, etc.;

  3. The valuation of the stock or interest;

  4. If your company will buy out the departing or deceased shareholder's stock or interest.

All of these issues, and more, should be addressed in a good Shareholder/Operating/ Partnership Agreement to avoid the business pitfalls resulting from a change in personal circumstances.  An ounce of prevention is worth a pound of cure.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Tuesday
Dec062011

Steve Jobs Estate Taxes – Which Way is “Up” for the Jobs Family and for You?

 

by Robert A. Hull

As the world mourns the loss of innovative tech giant Steve Jobs, we learn he may have left his wife, Laurene, and family up to $6.78 billion dollars in Disney and Apple stock.

He also left his family in a quandary not of his own making, namely, how to negotiate financial pitfalls while traveling on uncertain terrain.

Unfortunately, with the recent failure of the so-called congressional Super Committee to address tax and spending reform, the “Bush tax cuts” are set to expire in 2013.

Capital Gains Tax Legislation: As it Stands Now

 

If there are no further changes in the law:

▪ The current 15 percent capital gains tax rate is set to rise to 20 percent,
▪ Income tax rates are due to increase,
▪ The current $5 million gift/estate tax exemption will return to a $1 million exemption.

The key takeaway is “absent further legislation”, i.e., no one knows what the law will be in 2013.

At least as far as the Jobs family is concerned, if they sell the stock before 2013, and (here’s the kicker) if indeed the Bush tax cuts lapse, the Jobs family may avoid almost hundreds of millions in capital gains tax they would have to pay at the higher 20 percent rate if they sold after 2013.

The great news is that the beneficiaries of Steve Jobs’ stock will receive an automatic step-up in basis of the stock to the value of such stock on Jobs’ date of death (including a step-up on Laurene’s ½ community property interest in such stock) – i.e., they will receive the benefit of the increase in the stock’s value since acquisition, tax free. However, any further increases (after Jobs’ death) in the value of the stock interest Jobs’ passed to his heirs will be subject to capital gains when the stock is sold.

So, there’s a capital gains tax of 15 percent or ‘possibly’ 20 percent, which prompt some questions:

1. How are individuals and businesses supposed to make certain financial decisions in the face of such uncertainty?

2. And, how are financial and estate planning professionals supposed to give sage advice and counsel when none of them know what the law will be in 14 months?

Steve Jobs’ Estate Taxes: Looking Up

 

The answer to both questions above is that effective planning in such uncertain times is a challenge. Obviously, if considerations other than tax consequences are paramount, then those business decisions may take care of themselves.

If the Jobs family wishes to retain Steve Jobs’ control of Apple, for example, they might hold on to the stock, risking a higher tax in the future if Congress does nothing or increases capital gains.

But, if the tax consequences are the most important consideration (hey, who really wants to give the government $876 million?) they may wish to sell the stock. But, the Jobs family will be divesting themselves of Steve Jobs’ legacy.

Tax and Estate Planning for Your Family

 

Many of you may be facing similar questions, though not on the scale of the Jobs family: To sell or not to sell? To gift or not to gift? For example, do you as parents and owners of a family business utilize the current $5 million gift tax exemption to gift portions of the family business to your children, even though you may prefer to do so in a few years?

If you do so before 2013, you can pass along $5 million of business value tax-free. If not, you risk having to pay gift tax on the portion of the business you pass which is worth over $1 million. . . unless Congress takes some other action, of course.

Given our government’s penchant for last minute deal-making, short-term fixes, and for striking bargains that are difficult to predict (like a “default” return to a $1 million exemption in 2013 absent further action), it may not be prudent to wait till the last minute to make these financial decisions.

Some decisions take time and fit into a family’s overall strategy (e.g., making gifts of minority interests in a family business or property, over time) and you may not have the necessary time to effectuate such a strategy or sell the stock before the new law goes into effect.

So, which way is up? And, where does this leave us all?

It leaves us in the same boat we’ve been in longer than any of us care to imagine – making life-altering financial decisions based on less information than we wish we had. However, it is nonetheless helpful to have a first mate on this trip, a professional who can help you best negotiate the rocks and reefs which may be lying just below the surface.

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

 

Thursday
Sep152011

Buy Sell Agreements – Protecting Your Interests From the Four Ds

Trusts & Estate Planning

 

by Kira S. Masteller
818.907.3244

 

Buy sell agreements are common estate planning tools for people with business partners. They ensure the continuity of the business in the event of the death, disability, retirement or withdrawal of one or more of the principles.

If you run a successful company with a business partner, you should consider executing a buy sell agreement to protect your own interests, as well as those of your family. Here are some scenarios to consider:

1. Death

▪ When a principle dies, will that person’s stock be repurchased, or can he or she leave that stock to a person of his or her choice? To assure the continuity of the business, it is usually best to repurchase the stock.

▪ Will the repurchase, if any, be done by the corporation or the other shareholders? This involves business and tax issues which will need to be discussed one on one with your attorney, since individual situations vary.

▪ A proper repurchase arrangement requires the use of life insurance, which also needs to be discussed in person to address your unique needs. For example, in a corporate redemption situation, if there is a $500,000 purchase price, the corporation will likely not have sufficient assets to pay that purchase price. Generally, life insurance is used for these purposes. (Be sure to read my previous blog, “Your Life Insurance Review” to understand why it’s important to keep your policies up to date.)

2. Disability

▪ If a principle becomes disabled, will s/he continue to receive salary and benefits? If yes, for how long? That person cannot receive salary payments indefinitely, because at some point those payments will be deemed to be dividends, which is subject to double tax.

▪ Will a disabled shareholder’s stock be repurchased? If so, we will have to discuss how the payments will be made, since life insurance will not be available for this purpose.

▪ Some of these issues can be addressed in employment agreements.

3. Departure or Retirement

▪ Will a shareholder’s stock be repurchased in the event s/he retires or withdraws? Typically, this does not happen because it places an economic drain on the corporation.

4. Divorce

▪ If your partner separates or divorces, will that put your interests in the company at risk? A buy sell agreement can protect you or your partner from unforeseen events like this.

If you co-own a business, it might be time for you to consider the future of your company and maintaining financial interests for yourself and your family. Buy sell agreements are one of the best ways to protect those interests from unforeseen events.

Kira S. Masteller is a California Trust Attorney and Shareholder in our Tax and Estate Planning Practice Group. You can reach her at 818.990.2120.

 

 
Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

 

LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120