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Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
Business Succession Planning 04 2009
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Business Succession Planning 04 2009

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  • 1. Business Succession Planning Vincent J Gallo CLU ChFC AEP Vincent J Gallo & Associates, Inc. Winston-Salem, NC
  • 2. Agenda • Overview of business succession planning • Estate planning fundamentals • Business succession planning techniques
  • 3. Overview of business succession planning • More than 80% of businesses in the U.S. are private and/or family dominated • Businesses owned or dominated by the members of a single family make up 175 of the Fortune 500 • International Family Business Program Association estimated that family firms contribute 60%-75% of the U.S. G.D.P.
  • 4. Overview of business succession planning • Closely held businesses have an extraordinary failure rate: – 70% do not survive to the second generation – 85% do not survive to the third generation – The average family owned business lasts only 24 years
  • 5. Estate planning fundamentals • General Rule - All asset transfers are taxable – Exceptions • Marital transfers • Annual gifts • Tuition or medical expenses • Charitable gifts • Unified credit (or “lifetime exemption”)
  • 6. Estate planning fundamentals • Qualified Family Owned Business Exclusion – Additional exclusion is available for qualified family owned business interests (QFOBI) – Can increase overall exclusion amount to $1,300,000 – In order to qualify • QFOBIs must exceed 50% of the gross estate • Decedent or member of family must have “materially participated” in business for at least 5 of last 8 years • Situated in U.S. • Other qualification requirements
  • 7. Minimizing Estate Taxation • Best way to reduce overall estate taxation is through “Estate Reduction” • Reduce the value of the taxable estate – without losing control – while retaining cash flow – paying minimum transfer taxes
  • 8. Wealth transfer techniques • Five techniques for business succession planning – Buy/Sell Agreements – Family Limited Partnerships – S Corp Recapitalizations – Employee Stock Ownership Plans – Intentionally Defective Grantor Trusts
  • 9. Wealth transfer techniques • Technique #1: Buy/Sell Agreements – Agreement among Company and Shareholders to buy stock from shareholders upon certain events: • Disability • Retirement • Death • Divorce
  • 10. Wealth transfer techniques • Technique #1: Buy/Sell Agreements – Two Types of Agreements • Stock Redemption - Company buys stock from shareholder • Cross Purchase - Other shareholder(s) buy stock from shareholder • Common to use insurance or borrowing to provide funding – How it works • Company and shareholders enter into agreement • Upon specified event, affected shareholder must sell stock to company and/or other shareholders
  • 11. Wealth transfer techniques • Technique #1: Buy/Sell Agreements – Price is either set annually, or more likely, an appraisal process is outlined in the agreement – Advantages • Provides protection to the company and shareholders • Provides liquidity to shareholders – Disadvantages • Accomplishes only minimal estate planning • No wealth transfer achieved
  • 12. Wealth transfer techniques • Technique #2: Family Limited Partnerships – Family Limited Partnership (“FLP”) is a limited partnership established under state law – There are 2 classes of partners: • General Partner - Very little economic interest (typically 1%) but virtually all management control • Limited Partner - Virtually all of the economic interest, but very little management control – Donor contributes assets to the FLP in exchange for both general and limited partnership interests
  • 13. Wealth transfer techniques • Technique #2: Family Limited Partnerships – Donor makes gifts of limited partnership interests to next generation. • Annual exclusion • Unified credit – Valuation discounts are often taken. The two types: • Lack of marketability • Lack of management control (minority interest) – Retention of general partnership interest allows senior generation to retain control while transferring value out of taxable estate.
  • 14. Wealth transfer techniques • Technique #2: Family Limited Partnerships – Advantages • Discounts • Separation between ownership and control • Consolidated management of assets • Potential asset protection – Disadvantages • Separate entity which requires administration and tax returns • General partner has fiduciary duty to limited partners • IRS scrutiny
  • 15. Wealth transfer techniques • Technique #3: “S” Corp. Recapitalization – What is it? • FLP-type technique for “S” Corporations – “S” Corporation • Cannot be owned by a partnership (FLP not available) • Cannot have more than one class of stock – However, “S” corporation can have more than one kind of stock (voting vs. non-voting)
  • 16. Wealth transfer techniques • Technique #3: “S” Corp. Recapitalization – “S” Corporation is recapitalized to have: • Voting common stock • Non-voting common stock – Gifts of non-voting common stock are then made to the next generation – Discounting available: • Lack of Control • Lack of Marketability
  • 17. Wealth transfer techniques • Technique #3: “S” Corp. Recapitalization – Advantages • Discounts • Separation of ownership and control – Disadvantages • Potential premium placed on the voting stock • Wealth transfer is not accomplished without additional gifting or other transfer techniques
  • 18. Wealth transfer techniques • Technique #4: Employee Stock Ownership Plan – Closely-held company establishes an employee stock ownership plan (“ESOP”) – ESOP borrows funds to finance purchase – ESOP purchases stock from principal owner(s) – Selling shareholders may elect to reinvest the proceeds in “qualifying replacement securities” in order to defer capital gains tax – May leverage against bonds to finance diversification – Capital gains are deferred until replacement securities are sold, or eliminated entirely if held until death or donated to charity
  • 19. Wealth transfer techniques • Technique #4: Employee Stock Ownership Plan – Advantages • Owners/Sellers – Provides liquidity – Diversification without paying current taxes – Beneficial scenarios • Retiring shareholder • Creation of a market for company stock • Relieve company of cash surplus • Employees – Become owners of corporation (motivation) – Retirement benefit
  • 20. Wealth transfer techniques • Technique #4: Employee Stock Ownership Plan – Disadvantages • Must have individual(s) who are willing and able to continue business after current owners have sold • ESOPs are effective but are subject to many rules and regulations and should be considered only after a thorough examination of all factors involved
  • 21. Wealth transfer techniques • Technique #5: Intentionally Defective Grantor Trust – Accomplished by selling asset (stock) to trust in exchange for a small cash down-payment and a long-term installment note – “Freezing” Technique • Freeze value of an asset • Freeze return on an asset
  • 22. Wealth transfer techniques • Technique #5: Intentionally Defective Grantor Trust – Trust • Usually children are beneficiaries • Defective - income taxes are paid by grantor • Income taxes paid on trust income are not additional gift – Sale to trust • Business owner receives cash and installment note for balance • No capital gain on sale • Installment obligation is paid through income received by trust
  • 23. Wealth transfer techniques • Technique #5: Intentionally Defective Grantor Trust – Advantages • No income taxes on sale to trust • Payment of income taxes on trust does not create additional gift • Trust can control timing and amount of distributions to beneficiaries – Disadvantages • Cash flow may be insufficient to pay installment obligation • Seller’s estate will include balance of outstanding note • Undistributed trust income is subject to higher trust tax rates
  • 24. Business succession planning • Summary – A number of techniques exist to minimize estate tax exposure while achieving owner’s wishes – A number of factors influence the choice of which technique(s) is appropriate – Whichever technique is used, should be part of a comprehensive financial and estate plan
  • 25. Wealth transfer techniques • Technique #2: Family Limited Partnerships Parents transfer Family Limited assets to partnership Partnership in tax-free exchange Gifts 99% Limited 1% General Children Partners Partner Grandchildren
  • 26. Wealth transfer techniques • Technique #4: Employee Stock Ownership Plan Cash Qualified Business Replacement Owner(s) Securities Stock Cash “C” corporation Retirement Contributions Employee Stock Ownership Plan Cash (must own 30% Bank of company) Interest & Principal Payments on Note
  • 27. Wealth transfer techniques • Technique #5: Intentionally Defective Grantor Trust Cash (gift) Parents Grantor Trust Company Stock Grantor Trust Cash and Parents Company Cash and Stock Note Receivable Beneficiaries
  • 28. Final Thought • Having a Good Estate Plan Will Not Accelerate the Date of Death
  • 29. Overview of business succession planning • Private companies have key advantages vs. public ownership – Typically, no separation between ownership and control – Investors have longer term perspective – Management invests less personal and financial capital in managing investor expectations – Flexible organizational structures
  • 30. Overview of business succession planning • Objective forward planning is critical • Advance planning permits balancing of income, charitable and family wealth issues • Estate taxes are confiscatory yet elective
  • 31. Overview of business succession planning • Effect of Estate Taxes Without Planning Your Family's Share of Your Estate The Government's Share of Your Estate
  • 32. Overview of business succession planning • Effect of Estate Taxes With Planning Your Family's Share of Your Estate The Government's Share of Your Estate Estate Tax Savings???
  • 33. Marketing Strategy • Review All Succession Alternatives • Don’t show bias to one technique • Optimize transfer transaction • Control • Valuation • Identify Liquidity Need • Cost Out Alternatives • Installment Sale at Death • Loans • Life Insurance • Identify Funding Alternatives • Term of payment • Leverage
  • 34. Questions or Free initial Consultation Please contact: vincegallo@vincegallo.com Or 336.765.0122

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