Improve Your Practice by Adding
Business Succession Planning
Services
Presented By:
James J. Flick
Central Florida Forum of Estate Planning Attorneys
Orlando, Florida
February 22, 2013
I.) INTRODUCTION.
Beginning in 1970, estate tax planning grew
rapidly. However, in recent years the growth has
slowed considerably and may even be shrinking.
A variety of developments contributed to the
slowdown, including:
– Many
states
have
simplified
the
probate
administration process
– The dramatic increase in the federal estate tax
exemption since 2001
– Popularity of LegalZoom.com and other low cost
providers of legal documents
I.) INTRODUCTION.
In response to these developments, estate
tax planning attorneys must consider
expanding into complementary areas of
practice.
The purpose of this outline is to provide
information for estate planning attorneys
who wish to diversify their practice by
expanding into business succession
planning.
II.) BENEFITS OF OFFERING
BUSINESS PLANNING SERVICES.
More than 80% of the business enterprises in the United
States are family dominated.
Family-owned and family-managed businesses account
for 50% of the nation’s employment and 64% of its GDP.
Business owners are lucrative clients.
– Big cases involving complicated planning.
– More ongoing activity than virtually any other type of client.
II.) BENEFITS OF OFFERING
BUSINESS PLANNING SERVICES.
According to Kiplinger’s, in 2001 roughly 50,000
small business owners retired, but by 2009 the
number of retirees was expected to be
approximately 750,000 - a fifteen-fold increase.
Exit planning for closely held business owners
(Jeff Scroggin & the Future of Estate Planning,
Steve Leimberg’s Estate Planning Newsletter
#1657)
III.) RECENT FAMILY BUSINESS
SURVEYS.
A 2007 family business survey conducted by
Laird Norton Tyee, Oregon State University
and Seattle University revealed some
intriguing facts:
1. Almost 60% of majority owners in family businesses
are 55 or older (30% are 65 or older).
2. Over two-thirds believe the current CEO will not
leave during the next 5 years.
3. Less than 30% have formal succession plans and
less than 40% have a successor identified and
preparing for the transition.
III.) RECENT FAMILY BUSINESS
SURVEYS.
4. Two-thirds of family businesses don’t require
family members to have the qualifications or
experience necessary to be successful.
5. 25% believe the next generation is not
competent to run the business.
6. Shockingly, 93% depend almost exclusively on
the business for income.
III.) RECENT FAMILY BUSINESS
SURVEYS.
The 2007 MassMutual - Kennesaw State University
American Family Business Survey confirm the findings of
the Laid Norton Tyee survey.
– In addition, discovered that planning by business owners has
dropped since its prior survey conducted in 2002.
Unfortunately, the majority of family businesses fail to
survive the transition from one generation to the next.
– According to a report by the Small Business Survival Committee,
only 30% of these businesses survive into the second generation
of family ownership, and just 13% survive into the third
generation.
IV.) TRAINING AND SKILLS REQUIRED
TO PROVIDE BUSINESS SUCCESSION
PLANNING SERVICES.
A. Estate planning attorneys who wish to offer
business succession planning services need to
get additional training and education in
business succession planning
– Planning with buy-sell agreements
– Incentive compensation planning and estate
planning for closely-held businesses
– Income taxation of individuals, corporations and
partnerships.
IV.) TRAINING AND SKILLS REQUIRED
TO PROVIDE BUSINESS SUCCESSION
PLANNING SERVICES.
B.
Business planning reference materials include:
1.
2.
3.
4.
5.
Corporate Buy-Sell Handbook by Stephen J. Leimberg.
Leimberg Associates, Inc. www.leimberg.com.
Structuring Buy-Sell Agreements: Analysis With Forms by
Howard M. Zaritsky. Warren, Gorham & Lamont Estate
Planning Treatise.
An Estate Planner’s Guide to Buy-Sell Agreements for the
Closely-Held Business by Louis A. Mezzullo. ABA Publishing
www.ababooks.org.
Estate Planning for the Family Business an ALI-ABA course
conducted annually (last course was 7/7/10 to 7/9/10),
excellent course materials and audiotapes, www.ali-aba.org.
Tax Planning for Family Wealth Transfers: Analysis With
Forms by Howard M. Zaritsky. Warren, Gorham & Lamont
Estate Planning Treatise.
IV.) TRAINING AND SKILLS REQUIRED
TO PROVIDE BUSINESS SUCCESSION
PLANNING SERVICES.
6.
7.
8.
9.
Estate Planning for Farms and Other Family-Owned
Businesses by Robert M. Bellatti. Warren, Gorham &
Lamont Estate Planning Treatise.
Business Enterprise Institute
a membership
organization that provides education, newsletters,
marketing materials, comprehensive exit planning
software (EPIC) and BEI Certified Exit Planning
credential. www.exitplanning.com.
Exit Planning Institute a membership organization that
provides education, newsletters, marketing materials,
and Certified Exit Planner credential. www.exitplanning-institute.com.
Family Business Experts web site with free articles,
checklists, questionnaires and good links. www.familybusiness-experts.com.
IV.) TRAINING AND SKILLS REQUIRED
TO PROVIDE BUSINESS SUCCESSION
PLANNING SERVICES.
C. Income taxation reference materials include:
1. WealthCounsel’s annual two day Tax Camp. The
first day is devoted to income taxation.
2. Estate Planning for the Family Business this ALIABA course includes a discussion of income tax
issues related to business succession planning (see
details above).
3. Tax and Financial Planning for the Closely Held
Family Business by Gary Zwick and James Jurinski.
www.ali-aba.org.
4. Corporate and Partnership/LLC Taxation For EP
Attorneys by Peter J. Parenti. Peter’s outline from a
2004 WealthCounsel presentation. Attached as an
exhibit.
V.) PRACTICE TOOLS IN
WEALTHDOCS AND THE KNOWLEDGE
BASE.
A.
WealthDocs Business Succession Planning System is
a module that appears in the WealthDocs – Advanced
Edition. It includes the following documents:
1. Buy-Sell Agreement – a comprehensive document
that offers the primary different types of agreements
and a large selection of optional provisions
including all commonly used provisions and various
sophisticated provisions
2. Employee Purchase/Bonus Agreement – a stock
purchase agreement for use in incentive planning
for key employees
V.) PRACTICE TOOLS IN
WEALTHDOCS AND THE KNOWLEDGE
BASE.
3. Section 83(b) Election – sample tax election to
recognize income from receipt of restricted property
4. Deferred Compensation Agreement – creates nonqualified
deferred
compensation
agreement,
phantom equity (stock) plan and equity (stock)
appreciation rights plan for use in incentive planning
for key employees
5. Top Hat IRS Letter – sample notice to the
Department of Labor regarding the establishment of
a key employee deferred compensation plan
6. Stay Bonus Plan – innovative plan designed to
retain key employees after the death or disability of
the sole owner of a business
V.) PRACTICE TOOLS IN
WEALTHDOCS AND THE KNOWLEDGE
BASE.
B.
Practice tools found in the Knowledge Base on
WealthCounsel’s website include:
1. Asset Purchase Agreement (2007) – sample
agreement for a business asset sale
2. Buy-Sell Agreements: Outline and Sample
Agreements by Louis Mezzullo (2004)
3. EP 207 – Drafting Business Succession
Documents: WealthCounsel outline from a
December, 2006 two day course (472 pages).
Contains an introduction to the Business
Succession Planning System and sample forms;
including several forms not available in the
Business Succession Planning System.
4. One Way Buy-Sell Agreement (2007) – a buy-sell
agreement designed for use by a sole business
owner and key employees
VI.) MARKETING BUSINESS
SUCCESSION PLANNING SERVICES.
A.
New Clients
1. Determine if They Own an Interest in a Business:
Data Collection.
–
Estate planning questionnaires should request information
about any interest owned in a business.
–
Get a copy of existing buy- sell agreements, retirement
plans, organizational documents, and a listing of existing
owners of the business.
2. Integrate Estate and Business Plan.
–
A proper estate plan must integrate the business planning
into the estate plan.
–
The estate planning should include a review and analysis
of the existing business succession plan.
VI.) MARKETING BUSINESS
SUCCESSION PLANNING SERVICES.
B. Contact Existing Clients
1. Inform Existing Clients That You Provide Business
Succession Planning.
–
Tell your existing clients. Otherwise, they will assume that
all you do is estate planning and that you do not provide
business-planning services.
2. Methods to Contact Existing Clients.
–
Contact existing clients are by telephone, mail and email.
–
For high net worth clients, personal call are best.
–
Send a letter informing existing clients that you now are
offering business-planning services.
VI.) MARKETING BUSINESS
SUCCESSION PLANNING SERVICES.
C.
Insurance Professionals
1. Insurance Professionals a Top Source.
–
–
–
The nature of business succession planning tends to generate
significant insurance sales.
Insurance professionals initiate more business succession
planning than attorneys, financial planners and CPAs.
Often, insurance professional have more expertise and
experience in business succession planning than do other
professionals.
2. Contact Existing Insurance Professionals.
–
–
Inform all life insurance professionals that you work with that you
are doing business succession planning. A personal phone call or
visit to the insurance professional would be best.
Offer to attend meetings with the insurance professional and
prospective business succession planning clients at no charge.
VI.) MARKETING BUSINESS
SUCCESSION PLANNING SERVICES.
3. Establish Relationships
Professionals.
–
with
New
Insurance
In your meetings with insurance professionals, point out
that your practice offers special services to help business
owners with their estate and business succession planning.
Let them know that you recognize the important role that
insurance plays in business succession planning.
VI.) MARKETING BUSINESS
SUCCESSION PLANNING SERVICES.
Certified Public Accountants.
D.
–
–
CPAs work with many closely held businesses and are an excellent
source of clients for business succession work.
Difficulty is convincing them to refer business succession clients to
your practice.
Other Attorneys.
E.
–
–
–
–
Attorneys who do not do business succession planning can be good
referral sources.
Corporate/business law attorneys and in-house counsel.
When working with other lawyers, you have to be very careful not to
disturb the existing relationship the lawyer has with their client.
Reinforce that you are brought in to only do the succession planning
and that the company attorney is a crucial participant in the planning
team.
VI.) MARKETING BUSINESS
SUCCESSION PLANNING SERVICES.
Seminars to the Public.
F.
–
–
Give seminars to business owners.
Invitations to business owners and rain brokers are a good
way to reinforce that you provide business succession
planning.
Seminars to Professionals.
G.
–
Provide seminars to
planners and CPAs.
Insurance
professionals,
financial
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
A. Traditionally, business succession planning focused on
the preparation of a buy-sell agreement designed to
establish an orderly transfer of ownership interests
upon the death, disability or retirement of a business
owner.
1. This planning focused more on estate planning than on
assuring the successful continuation of the business after the
loss of an owner or key employee.
2. Typically initiated at the prompting of an insurance advisor or
estate planning attorney who warns that unless owners take
prudent measures, they will leave their families unprotected in
the event of death of permanent disability.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
3. The business owner and insurance advisor or
estate planning attorney determine the terms and
provisions of the buy-sell agreement. The estate
planning attorney, or an attorney recommended by
the insurance advisor, prepares the agreement.
4. The insurance advisor assists the business owner in
selecting insurance products to fund all, or some, of
the purchase obligations under the buy-sell
agreement.
5. If the planning is initiated by the estate planning
attorney, the attorney updates the business owner’s
estate plan to integrate the business planning.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
B. Basic Primer on Buy-Sell Agreements. The
three basic forms of buy-sell agreements are
(1) the redemption agreement; (2) the crosspurchase agreement; and (3) the hybrid
agreement.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
1. Redemption Agreement (entity purchase).
Under a redemption arrangement, the
corporation redeems the shares of a
deceased shareholder at his death.
a. Advantages:
i.
The simplicity of only one life insurance policy per
shareholder
ii. Premium costs are allocated to the shareholders
according to their percentage ownership in the
corporation
iii. Assures compliance with the terms of the buy-sell
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
b. Disadvantages:
i. No step-up basis in purchased shares
ii. The insurance policies are subject to attachment by the
corporation’s creditors
iii. If the corporation is a C corp., the death proceeds may
also be subject to the alternative minimum tax
iv. If corporate-owned buy-sell policies are over-funded to
provide non-qualified retirement benefits to the owners,
the benefits are generally taxable.
v. For an S-corp owner, the results are slightly better
because the shareholder has some basis in the policy
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
2. Cross Purchase Agreement. Under a cross
purchase arrangement, each surviving
owner buys the deceased shareholder’s
stock directly from his estate.
a. Advantages:
i.
Because individuals own the policies and receive the
income tax-free death benefit, they can obtain a full
basis step-up by buying the stock directly from the
decedent’s estate.
ii. Policies are protected from the corporation’s creditors
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
b. Disadvantages:
i.
The most obvious disadvantage is the number of
policies required to accomplish the funding.
ii. Policies are subject to attachment by shareholder’s
creditors.
iii. A shareholder may fail to pay premiums or refuse to
pay death benefits pursuant to the buy-sell agreement.
iv. The premium burden is allocated based on the cost of
insurance of each other shareholder.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
3.
Hybrid Agreement (“Wait and See”). In a hybrid
agreement, each owner agrees to offer to sell his or
her ownership interest to the entity and to the other
business owners.
a.
b.
In most hybrid agreements, the business owner (or his or
her estate) first offers to sell the interest to the entity, and
offers it to the other owners only if the entity declines to
buy it.
Advantages: The common “wait and see” approach allows
surviving shareholders to keep the insurance proceeds for
themselves and use any retained corporate earnings to
effectuate a redemption.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
C.
Tax Considerations for Buy-Sell Agreements.
1.
Tax Considerations for a Corporation. A corporation
must address the following income tax issues:
a.
b.
c.
Deductibility of premiums on insurance policies used to
finance the purchases under the agreement.
Taxation of life insurance proceeds received with respect
to policies used to provide money to redeem the stock of a
deceased stockholder.
Recognition of gain or loss on the purchase of the
corporation's own shares with cash or with appreciated
assets.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
d. The corporation's basis in stock it purchases
from a stockholder.
e. The effect of a purchase of its shares on a
corporation's earnings and profits.
f. The effect of a purchase on corporate net
operating loss carryovers.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
2.
Income
Tax
Considerations
for
Stockholders.
Stockholders must be concerned about both income tax and
transfer tax issues with respect to their buy-sell agreements.
The tax considerations vary depending upon the type of
agreement used.
a.
Redemption Agreement (sale to the business entity)
i.
Treatment of the distribution as a sale or exchange, rather
than a distribution, under IRC Sections 302 and 303.
ii. Constructive dividend treatment when the corporation
assumes the obligation of the stockholder to buy shares.
iii. Compensation treatment under IRC Section 83.
iv. Installment sales or annuity treatment on deferred payment
sales of stock to a corporation.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
b. Cross-Purchase
Agreement
(sale
to
other
owners)
i. Capital gains on the sale of stock.
ii. Installment sales or annuity treatment on a deferred
payment.
iii. Compensation treatment under IRC Section 83.
iv. Effect of the sale on S corporation status.
c.
Hybrid Agreement.
The tax considerations under a
hybrid agreement will depend on the identity of the actual
purchaser of ownership interests when a transfer occurs.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
3. Income Tax Considerations for Sales of
Partnership Interests. The income tax treatment of
the sale of a partnership or membership interest of an LLC
taxed as a partnership differs from the treatment of the sale of
corporate stock in several material respects.
a. Compliance with the family partnership or LLC rules of
IRC Section 704.
b. Effect of the sale of the interest on the entity's taxable
year with respect to the selling partner or member and
with respect to the remaining partners or members,
under IRC Section 706.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
c.
Recognition of gain or loss by the selling partner
or member.
d. Character of any gain recognized on a sale of a
partnership or membership interest to other
partners or members as ordinary income under
IRC Section 751, including allocation of the
purchase price among various component
assets by the agreement of the parties.
e. Character
of payments from the entity as
ordinary income (or as a distributive share of
profits) or payments for a share of goodwill under
IRC Section 736.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
4. Estate and Gift Tax Considerations.
a. Fixing
estate tax values with a buy-sell
agreement, whether between related or
unrelated persons pursuant to the requirements
under IRC Section 2703.
b. Integrating a buy-sell agreement into a marital
deduction estate plan so that valuation set in the
agreement is also used for deduction purposes.
VII.) THE TRADITIONAL APPROACH TO
BUSINESS SUCCESSION PLANNNG.
Making a buy-sell agreement work together with
IRC Section 303 (favorable income tax on
certain redemptions), IRC Section 2057 (the
deduction for qualified family owned business
interests), and IRC Section 6166 (fifteen year
deferral of estate taxes on certain closely-held
business interests).
d. Avoiding gift tax and GSTT on the creation of a
buy-sell agreement.
e. Avoiding gift tax and GSTT on lifetime transfers
pursuant to buy-sell agreements.
c.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
A. Business Exit Planning is a systematic process
resulting in an owner’s transition out of the
business. The process:
1. Identifies and organizes owner-driven exit planning
issues.
2. Creates a formal written plan of recommended
actions.
3. Acknowledges and requires a multi-disciplinary
approach to exit planning and implementation of
recommendations.
4. Incorporates implementation and accountability
timeline.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
B. Step 1: Setting Exit Objectives.
1. Benefits to Owner:
a. Clarify owner’s objectives and determine what
owner wants, or needs, to whom the business
will be sold or transferred, and when the owner
will exit the business.
b. Prioritize owner’s objectives which can compete
and conflict with one another.
c. Allows owner to control the process.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
2. Three Universal Objectives:
a. How much longer does business owner want to
work in the business before retiring or moving
on? ____ years
b. What is the annual after-tax income business
owner wants during retirement (in today’s
dollars)? $_____
c. Who does business owner want to transfer the
business to? Family, co-owner, key employee(s)
or outside party?
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
3. Additional Owner Objectives:
a. Shifting wealth to children
b. Reward employees
c. Receive full value for business
d. Take business to next level
e. Maintain ownership indefinitely
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
4.
Creating the Advisor Team:
a.
No one professional has all of the answers. Many
diversified skills and talents are necessary. Specialized
skills and experience are necessary.
b.
Who is on the Advisor Team?
i.
ii.
iii.
iv.
Financial/ Insurance Advisor
Business/ Estate Planning Attorney(s)
CPA
Transaction Intermediary (Business Broker or Investment
Banker) in a third party sale
v. Business Consultant
vi. Banker
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
C. Step 2: Determining Value/Price.
1.
What Is the Business Worth? Why do you need to
know?
a.
b.
The business is generally the owner’s most valuable asset.
Financial security depends on maximizing value and
converting that asset to cash.
The owner and advisors need to know the current value of
the business to determine if the owner’s financial objective
can be met at present.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
D.
Step 3: Preserving, Protecting and Promoting Value.
1.
If an owner is not going to transfer the business to an outside
third party immediately, it is important to the owner to
preserve, protect, and promote the value of the business.
2.
Three Components of Step Three.
a.
b.
c.
Preserving value from grasp of IRS. Minimizing ongoing
tax consequences, as well as tax consequences at the
time of sale is critically important.
Protecting value from creditors. It is important to protect
value from business and personal creditors.
Promoting value through Value Drivers. Finally, it is
important for most business owners to increase, or
promote, the value of their ownership interest before they
sell, so they are able to realize their financial objectives
upon the transfer of their businesses.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
3. Benefits to Owner:
a. Reduce income taxes upon sale by 25 - 100%
b.
c.
d.
e.
vs. no planning.
Create ability to sell the business.
Protect assets from potential business and
personal creditors.
Increase business value and cash flow.
Motivate and keep Key Employees.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
E. Step 4: Converting Business Value to Cash.
1.
Converting the business into cash almost always
means selling the business to an outside third
party. Most outside third parties are not interested
in companies valued at less than $5 million.
2.
Benefits to Owner of Third Party Sale:
a.
b.
c.
d.
Cash.
Minimize financial risk of exit.
Eliminate family succession issues.
Speedier exit.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
F. Step 5: Transferring the Business to CoOwners, Employees or Family.
1.
Surveys and actual experience show that most
business owners want to transfer their business to
an “insider”, like a child, co-owner or key employee.
This objective makes it key to motivate these
insiders and keep them from leaving the business.
2.
Benefits to Owner:
a.
b.
c.
Achieves the exit objective of selling to KEG (Key
Employee Group) or family.
Motivates and retains Key Employees
Planning the sale reduces risk
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
G. Step 6: Contingency Planning: “Making sure
the business continues when the owner
doesn’t.”
1.
Benefits to Owner:
a.
b.
c.
d.
e.
Retain ownership and control of company if co-owner
departs.
Ability to force non-contributing owners to leave business.
Provide consistency between lifetime and death objectives.
Ensure survival of the business for benefit of others.
Ensure family receives value of your ownership interest, in
cash.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
2.
Contingency Planning Issues:
a.
b.
c.
d.
3.
Continuity of Business Ownership.
Company’s loss of Financial Resources.
Loss of Key Talent – Owner.
Loss of Employees and Customers.
Business Continuity, CoOwner Buy-Sell Common Transfer
Events:
a.
b.
c.
d.
e.
f.
g.
Death
Disability
Transfer to Third Party
Termination of Employment
Retirement
Involuntary Transfer Due to Bankruptcy or Divorce
Business Disputes
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
4. Common Buy-Sell Problems:
a.
b.
c.
d.
Valuation not reviewed
Failure to cover all transfer events
No coordination of insurance
Failure to test practical viability of provisions
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
5. Sole Owner Business Continuity:
Communicate in writing your wishes if you
die or are disabled:
a. Continue the Business:
i. Transfer within family
ii. Sale to employees
iii. Sale to outside third party
b. Liquidation
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
6. The Stay Bonus:
a. Important employees to be compensated to
continue their commitment during transition
b. A written, funded plan providing periodic
bonuses (12-18 month time frame) for
employees who remain with the company during
transition.
c. Bonus is typically a fixed % of annual
compensation.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
H.
Step 7: Wealth Preservation.
1.
Normally, the business exit plan will require years of planning
and preparation before the owner will leave the business. It is
important that the owner have an up to date estate plan in
case the owner dies or becomes disabled before the planned
exit.
2.
Benefits to Owners:
a.
b.
c.
d.
Coordinates Business Succession wishes with estate plan.
In effect, estate planning becomes part of business planning.
Reduces estate taxes while ensuring business interest is
controlled by designated family members.
Estate planning is periodically reviewed as part of annual
planning meeting.
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
3. Wealth Preservation Planning: Pre-Sale:
a. Techniques Favoring High Growth/High Income
Assets:
i.
ii.
iii.
iv.
Defective Grantor Trust (IDITs)
Grantor Retained Annuity Trusts (GRAT’s)
Family Limited Partnerships (FLPs)
Discounted Intra-Family Sales (SCINs,
Annuities)
Private
VIII.) BUSINESS EXIT PLANNING: A
MODERN APPROACH TO BUSINESS
SUCCESSION PLANNING.
4. Wealth Preservation Planning: Post-Sale:
a. Changed Financial Circumstances
i. Changing Needs/Objectives
ii. Charitable
iii. Required revision of estate plan (if business transfer is
part of old estate plan)
iv. Original financial needs have been fulfilled by business
transfer
v. Estate tax considerations are paramount
IX.) CONCLUSION.
The uncertainty of the future of estate tax law and
its chilling effect on estate planning continues.
Many seasoned estate planning attorneys believe
that the golden years of estate tax planning have
ended. To be successful, estate planning attorneys
should consider expanding their practices into
complementary areas of practice. Business
succession planning is an excellent choice for many
estate planning attorneys. Business owners need
for business succession planning is not dependent
on the status of tax law and remains relatively
constant regardless of the state of the economy.