The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for the end of the estate tax regime by phasing out the Federal estate and generation-skipping transfer taxes beginning in 2002 and ending in with a repeal of these taxes at the end of the year 2009. There was a great deal of speculation about whether Congress, by not acting, would allow the repeal of the estate tax regime. Chapter 24 reviews the estate tax policy as it evolved from the inception of the unified system of wealth transfer taxes beginning in 1976. The rationale for this review was that the effect of the estate tax regime on business succession planning was essential knowledge for the advisor no matter what might come from Congress. The effective advisor needs to understand the influence of the estate tax regime on the planning for business owners, both from an historical and prospective point of view.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) was signed into law by President Obama on December 17, 2010. The act makes certain short-term changes to the estate tax regime. For decedents who die in 2011 or 2012, TRA 2010 sets new and unified estate tax, gift tax and generation-skipping transfer tax exemptions and rates. For 2011 and 2012, the federal estate tax exemption is $5 million and the estate tax rate for estates valued over this amount is 35%. The estate tax has also become unified with federal gift and generation-skipping transfer taxes such that the gift tax exemption and generation-skipping transfer tax exemption will be $5 million each and the tax rate for both of these taxes is 35%. TRA 2010 also provided “portability” of the federal estate tax exemption, so that married couples may add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse's estate tax exemption. Portability does not apply retroactively and is available only for deaths occurring in 2011 and 2012. The new law does not allow a surviving spouse to use the unused generation-skipping tax exemption of a predeceased spouse. If Congress does not act, in 2013 the current law will be back in effect with the exemption at $1 million and the top tax rate at 55%. This provision will ensure a condition of planning instability for estate planners for the next few years. Chapter 25 reviews the strategy of estate planning for these years of instability. The estate planning strategies will not change but will be implemented with a perspective of possible changes in the short-term and flexibility. The effective advisor needs to understand the strategies used by estate planners for business owners, both from an historical and prospective point of view.
Wednesday, November 16, 2011
Sunday, October 4, 2009
Forms
Business Succession Planning is written for all advisors, including lawyers. The Forms portion of the book is especially helpful to lawyers, but all advisors need to be familiar with common forms used with succession planning for business entities.
The forms section contains a sample shareholder agreement. This document contains owner agreements about triggers for buying and selling as well as management agreements. A similar document to be used by limited liability companies is the limited liability company operating agreement. Similarly included in the forms section is a limited partnership agreement. Other agreements of more specific application are a form annuity agreement for use in a business transfer and a qualified subchapter S trust, used with ownership of S corporations by trust entities.
The forms section contains a sample shareholder agreement. This document contains owner agreements about triggers for buying and selling as well as management agreements. A similar document to be used by limited liability companies is the limited liability company operating agreement. Similarly included in the forms section is a limited partnership agreement. Other agreements of more specific application are a form annuity agreement for use in a business transfer and a qualified subchapter S trust, used with ownership of S corporations by trust entities.
Tuesday, September 15, 2009
Installment Payment of Estate Tax
Generally the most significant liquidity need of an estate is its liability for federal estate taxes. These taxes are due nine months from the date of the decedent’s death. Recognizing that closely-held businesses are likely to face serious liquidity problems, and attempting to create a relief provision to make it unnecessary to sell the business interest to pay death taxes, Congress enacted a provision to permit the deferral of estate tax payments. §6166.
§6166 is available only if the decedent was a U.S. citizen or resident at the time of death, and the value of the decedent’s interest in a closely-held business exceeds 35% of the value of the decedent’s adjusted gross estate (defined in the same manner as under §303. §6166(a)(1). If these tests are met, the personal representative of the decedent’s estate can elect to defer for 5 years payment of the portion of the estate taxes attributable to the closely held business interest (multiply the total estate tax liability times the ratio of the value of the business interest to the value of the adjusted gross estate) and thereafter pay the deferred portion in up to 10 annual installments. The estate tax attributable to non-closely held business assets is due at the regular time, 9 months from the decedent’s date of death.
Chapter 22 of Business Planning Succession describes the installment payment of estate tax and the intricacies of using that method of paying federal estate taxes.
§6166 is available only if the decedent was a U.S. citizen or resident at the time of death, and the value of the decedent’s interest in a closely-held business exceeds 35% of the value of the decedent’s adjusted gross estate (defined in the same manner as under §303. §6166(a)(1). If these tests are met, the personal representative of the decedent’s estate can elect to defer for 5 years payment of the portion of the estate taxes attributable to the closely held business interest (multiply the total estate tax liability times the ratio of the value of the business interest to the value of the adjusted gross estate) and thereafter pay the deferred portion in up to 10 annual installments. The estate tax attributable to non-closely held business assets is due at the regular time, 9 months from the decedent’s date of death.
Chapter 22 of Business Planning Succession describes the installment payment of estate tax and the intricacies of using that method of paying federal estate taxes.
Tuesday, September 8, 2009
Redemptions to Pay Taxes
Redemptions of stock may be necessary to pay death taxes attributable to stock ownership in closely held corporations. Congress enacted a special relief provision, § 303 of the Internal Revenue Code. § 303 treats as an exchange (and not a dividend) a redemption of the decedent’s stock so long as more than 35% the decedent’s adjusted gross estate consists of the stock of the closely held corporation.
Chapter 21 of Business Succession Planning deals with redemptions to pay taxes pursuant to this provision and explains the requirements of § 303 and important preparatory strategies if it is foreseeable that § 303 will be used.
Chapter 21 of Business Succession Planning deals with redemptions to pay taxes pursuant to this provision and explains the requirements of § 303 and important preparatory strategies if it is foreseeable that § 303 will be used.
Thursday, September 3, 2009
Gifting of Ownership Interests
Consistently business owners are told by tax advisors that it is better to not own a business interest at the time of death. From the point of view of the owner’s estate, there is the problem of having to include the value of the business interest in the estate. Aside from the issues involving payment of the tax, there is the issue of the appropriate value to place upon the business interest and whether that value will be attacked by taxing authority. From the point of view of the business, there is the problem of who will become the new owner or owners of the business interest. Will the new owner or owners also be managers of the business? If they are not managers, will the aspect of investment return on the owners’ interest be emphasized in a way it was not before?
There is no panacea in simply gifting business interests to children. Frequently much of the wealth of the family is in the business. There are tax and natural incentives to transfer the business to the children. There usually is a strong, if not overwhelming, desire on the part of the parent to treat children equally. Frequently not all of the children will be involved in the business. When this is the case, the effect of having inactive or non-managing owners should be carefully considered as a part of the overall estate planning process. The tension between owner-managers and passive owners is usually that certain benefits are available from the business to owner-managers. These may include fringe benefits, life style enhancements involving travel, automobile use, and other business-related expenses that will not be available to passive owners. The value of these benefits will be difficult to develop, but it will affect the profit of the business, which will be the primary concern of the passive owner.
Chapter 20 of Business Succession Planning deals with the means by which the gift of a business interest can be accomplished and the factors involved with that process. The chapter covers why the gifting of a business interest is more attractive from an estate tax perspective than a gift at death. The difference in the basis acquired by the donee as compared to a purchaser of a business interest is explained. Also techniques of gift giving are explained.
There is no panacea in simply gifting business interests to children. Frequently much of the wealth of the family is in the business. There are tax and natural incentives to transfer the business to the children. There usually is a strong, if not overwhelming, desire on the part of the parent to treat children equally. Frequently not all of the children will be involved in the business. When this is the case, the effect of having inactive or non-managing owners should be carefully considered as a part of the overall estate planning process. The tension between owner-managers and passive owners is usually that certain benefits are available from the business to owner-managers. These may include fringe benefits, life style enhancements involving travel, automobile use, and other business-related expenses that will not be available to passive owners. The value of these benefits will be difficult to develop, but it will affect the profit of the business, which will be the primary concern of the passive owner.
Chapter 20 of Business Succession Planning deals with the means by which the gift of a business interest can be accomplished and the factors involved with that process. The chapter covers why the gifting of a business interest is more attractive from an estate tax perspective than a gift at death. The difference in the basis acquired by the donee as compared to a purchaser of a business interest is explained. Also techniques of gift giving are explained.
Saturday, August 22, 2009
Covenants Not To Compete
A buy-sell agreement should consider means by which a business and the remaining owners are protected against the perfidy or talent of a former employee-owner. Part of this consideration should be the acknowledgement that any former employee-owner is entitled to earn a livelihood with the skills and experience possessed by that person. These concerns are dealt with by the terms of noncompetition, nonsolicitation, and confidentiality clauses.
Chapter 19 of Business Succession Planning deals with the issues concerning these clauses. Many states have enacted legislation governing noncompete agreements. Often these clauses are sought to be enforced by injunction. Frequently there are provisions for damages as well. Court cases often evolve, rightly or wrongly, about the reason for employment termination and the nature of the trigger compelling sale of ownership in the buy-sell agreement.
Chapter 19 of Business Succession Planning deals with the issues concerning these clauses. Many states have enacted legislation governing noncompete agreements. Often these clauses are sought to be enforced by injunction. Frequently there are provisions for damages as well. Court cases often evolve, rightly or wrongly, about the reason for employment termination and the nature of the trigger compelling sale of ownership in the buy-sell agreement.
Sunday, August 16, 2009
Transfer Restrictions
For an ownership agreement to work effectively it must limit the marketability of ownership interests involved in the agreement. Otherwise, the agreement is avoided simply by an owner with a marketable interest selling that interest to a party not bound by the agreement. If this can be done, it will prejudice the economic interest of minority ownership interests who will not have marketable interests.
On the other hand, there is a policy in common and statutory law against restrictions on alienation of property. While these concepts come mostly from the law of real property, it has generally been held that an absolute prohibition on transfer of ownership interest or a restriction on transfer of ownership interest that requires consent of the other owners is invalid.
Therefore ownership agreements involving buy-sell provisions typically have given the other owners, either acting on behalf of the business entity or in their own interest, the first option, right of first refusal, or first opportunity to purchase the interest at an agreed upon price.
Chapter 18 of Business Succession Planning deals with Transfer Restrictions and some of the issues involved with drafting and enforcing these restrictions.
On the other hand, there is a policy in common and statutory law against restrictions on alienation of property. While these concepts come mostly from the law of real property, it has generally been held that an absolute prohibition on transfer of ownership interest or a restriction on transfer of ownership interest that requires consent of the other owners is invalid.
Therefore ownership agreements involving buy-sell provisions typically have given the other owners, either acting on behalf of the business entity or in their own interest, the first option, right of first refusal, or first opportunity to purchase the interest at an agreed upon price.
Chapter 18 of Business Succession Planning deals with Transfer Restrictions and some of the issues involved with drafting and enforcing these restrictions.
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