Preparing your business for transition with a focus on estate and tax considerations.

1. GETTING THE BUSINESS PREPARED
FOR TRANSITION:
ESTATE AND TAX CONSIDERATIONS
Anthony J. Madonia, Founder
233 S. Wacker Drive, Suite 6825
Chicago, IL 60606-1609
312-578-9300

2. ANTHONY J. MADONIA
 Founder and President, Anthony J. Madonia & Associates, Ltd.
 Bachelor of Arts in Accounting from University of Illinois
 Juris Doctorate from John Marshall Law School
 Certified Public Accountant
 Practice focus
 Estate Planning and Administration
 Business Planning
 Corporate Law
 Taxation
 Member
 American Bar Association
 American Association of Attorney-CPAs
 The Justinian Society of Lawyers
 Past Chair
 Asset Protection Committee of the Chicago Bar Association

3. TAXES GENERALLY DUE UPON SALE
 Capital Gains
 Excess of the amount realized over the adjusted cost basis
 Recapture of Certain Depreciation
 Taxed as ordinary income
 State and Local Taxes
 May Involve Capital Gains, Sales, Use Taxes
 May Involve Multiple States

4. CONSEQUENCES OF
TYPICAL BUSINESS SALE
 Liquidity
 Higher tax bracket
 Ability to Directly Manage the Business
 Income from After-tax Proceeds May Be Less

5. ESTATE AND TAX SOLUTIONS
 Transfer of business interests to family members
Outright gifts
Irrevocable trusts for the benefit of children
Family limited partnerships
 Irrevocable Life Insurance Trusts
 Grantor Retained Annuity Trusts
 Charitable Remainder Trusts
 Buy-Sell Agreements
 Equity Stripping

6. TRANSFERS OF BUSINESS INTERESTS
TO FAMILY MEMBERS
Move Interests From Selling Entity When
Values Are Low
Future Generations Receive Benefits of Sale
Proceeds When Sales is Complete
Asset Outside of Taxable Estate
EARLY ESTATE PLANNING REQUIRED

7. GIFTS TO FAMILY MEMBERS
Lifetime gift tax exclusion
 $5.34MM – Individual
 $10.68MM - Married Couple
Annual Cash/Assets Exclusion
 $14,000 – Individual
 $28,000 – Married Couple
Annual Gift Tax Free Gifts

8. GIFTS TO FAMILY MEMBERS
Benefits
Removes assets and resulting capital gains from your
estate
Allows you to pass shares or business interest to future
generations
Considerations
No certainty to future exclusion or tax rate
Outright gifts do not come with any asset protection
Loss of control over shares or other gifted assets
Future generations are responsible for capital gains
Cost basis carries over to next generation

9. LARGER TRANSFERS
Gifting More Than
Annual or Lifetime Exclusion
There are methods available to compress the
value of shares that are sold or gifted
Fractionalized ownership
Restrictions on transfer and management

10. STRUCTURAL CHANGES TO CONSIDER
Large Gifts of Shares May Fit
Within Lifetime Gift Exemption
 Valuing Closely Held Entities
 Market method
 Income method
 Net asset value method

11. IRREVOCABLE TRUST
Benefits Your Children/Heirs
Shares are Not Included in Business Owner’s
Estate
Children Can Take Advantage of Appreciation
of Shares Without Gift or Estate Tax
Option for Tax Flow-Through Grantor Trust
Trustmaker either gifts or sells assets to the trust
Assets Can Be: C-Corp, S-Corp, Partnership or LLC

12. IRREVOCABLE TRUST
 Benefits
Trustmaker’s Estate Reduced for Estate Tax Purposes
Value of Property in Trustmaker’s Estate Frozen
All Appreciation Passes to Trust Beneficiaries Without
Gift or Estate Tax
Trustmaker Pays Taxes on Trust Income Resulting in
Faster Growth of Beneficiaries’ Share of Trust Assets
Transactions Between Trustmaker and Trust Have No
Income Tax Consequences; Thus no gain/loss
recognized on sale
Trustmaker Can Retain Management Duties Over
Business

13. FAMILY LIMITED PARTNERSHIP
All or Most of Partners are Family Members
How it works
 General Partner Contributes Business Interests to the
Partnership in Exchange for Limited Partnership Interests
 General Partner Gives All or Portion of Interests to Their Children
 General Partner Retains Management and Control Over Assets
Provides Protection of Family Assets Upon Divorce
 Interest Likely Characterized As Non-Marital Property, Not
Subject to Equitable Division
Partnership Agreement May Provide Involuntary Transfer
(i.e. Divorce Court Award) is Subject to Buy/Sell Agreement
Provisions Requiring Purchase by Divorced Partner

14. FAMILY LIMITED PARTNERSHIP
Overall Benefits
 Achieves a Variety of Business, Estate, Tax Objectives
 Provides Centralized Management of Family Assets
 Avoids Family Disputes Allowing Smooth Transition of
Power Upon Death of Senior Generation
 Simplifies Gifting Especially Real Estate and Intellectual
Property
Tax Benefits
 Reduces the Taxable Estate of the General Partner
 Limited Partners Have No Right To Control
 Limitations on Transfer
 Receives Pass-Thru Entity Treatment for Federal Income
Taxes
 May Be Terminated Without Adverse Income Tax
Consequences

15. FAMILY LIMITED PARTNERSHIP
Estate Benefits
 Decedent’s Estate or Trust Will Hold Partnership Interest
vs. Assets, Greater Degree of Confidentiality
Asset Protection Benefits
 Creditors May Not Force Distributions
 Creditor Attached to a Partner’s interest, Does Not
Become a Partner, Cannot Vote or Cause Dissolution of
the Partnership; They Merely Become an Assignee
Assignee’s only right is to receive distributions
Assignee is taxed on its share of the partnership’s income,
making it pay tax on income it cannot reach.

16. IRREVOCABLE LIFE INSURANCE TRUST (ILIT)
Option for Business Owners with a High Net Worth
Due to Estate Tax Exposure in Buy/Sell Agreements
How It Works
 ILIT trustee and Other Business Owners Enter Buy-Sell
Agreement
 Owner’s ILIT Purchases Life Insurance Policies on Other Owners
 Owner Provides Funds for the ILIT Trustee to Pay Premiums by
Making Gifts/Loans to ILIT
 Shareholder Agreement Provides for Buyout by ILIT
 Upon Owner’s Death, ILIT Trustee Receives Proceeds; Uses
Them to Purchase ILIT’s shares of Deceased Owner’s Interest

17. IRREVOCABLE LIFE INSURANCE TRUST
Benefits
 Business Interest Purchased by the ILIT is Not Included in
Owner’s Taxable Estate
 Provisions of ILIT Can be Drafted to Accomplish Owner’s
Objectives
 Upon owner’s death, ILIT Can Become Owner of His
Share of Business, Leading to Centralized Management of
Business Interest for Beneficiaries

18. GRANTOR RETAINED ANNUITY TRUST (GRAT)
Irrevocable Trust Where Grantor Retains Right to
Receive a Fixed Annual Amount From Trust For
Fixed Period After Initial Contribution
 After Fixed Period GRAT Terminates
 Remaining Assets Are Either Continued in Further
Trust or Distributed Outright to Beneficiaries
 Initial Contribution of Property is Subject to Gift Tax
 Any Appreciation of the Property is not subject to
addt’l gift taxes

19. GRANTOR RETAINED ANNUITY TRUST (GRAT)
Benefits
 Owner Keeps All or Most of the Business Income
 Owner Retain Management Control Before Passing It
to Beneficiaries
 Keeps Transfer of Ownership from Becoming Public
 Asset Protection for Current and Future Generations

20. CHARITABLE REMAINDER TRUST (CRT)
Irrevocable Trust with Income Paid to Trust
Beneficiaries for a Term or Life with Remaining
Assets Going to Charity
How It Works
 Business Owner Contributes Ownership Interests to CRT
 CRT Sells Interest to a Third-party Buyer
 CRT Does Not Incur Capital Gains Tax on the Sale
Transaction
 CRT Uses Cash Left to Make Annuity Payments to Owner
and Spouse for Life
 Upon Death of the Owner and Spouse, CRT Terminates
and Remaining Balance is Paid to Designated Charities

21. CHARITABLE REMAINDER TRUST (CRT)
Benefits
 Owner Receives Charitable Deduction Upon Transfer of
Assets to CRT
 When CRT Sells Stock or Other Business Interests, No
Capital Gains Tax is Paid (More Money for Trust Beneficiary
Payout)
 CRT Itself is a Tax-Exempt Entity; Not subject to tax
 Beneficiaries Pay Tax on Income Distributions from CRT
 Interest in CRT is Not Included in Owner’s Estate
Possible Downside
 Assets are Ultimately Passed to Charity, Not to Future
Generations; However, Tax Savings and Increased Cash Flow
Can Be Used to Purchase Insurance for ILIT for heirs

22. OTHER CHARITABLE GIVING OPTIONS
Charitable Gift Annuities
 Gift of Cash or Other Assets to Charity in Return for
Amount of Income for Life
Charitable Lead Trusts
 Provides Income Stream for Charity for Set Period of Time,
Then Transfers Trust Assets to Named Beneficiaries
Donor Advised Funds
Private Charitable Foundations

23. BUY-SELL AGREEMENTS
 Contracts Between Business Owners or
Between Business Owners and Their Business
 These Contracts Become Part of Corporate
Bylaws, Shareholder Agreement, Partnership
Agreement or LLC Operating Agreement
 Can Be Updated Periodically as Needs and
Assets of Business Change

24. BUY-SELL AGREEMENTS
Why Have a Buy-Sell Agreement?
If a Business Owner Dies Without a Buy-Sell Agreement or
Some Other Arrangement for His Shares in a Business,
Those Shares Will Pass to Beneficiaries As Indicated in
Will, Trust or State Law
Possible Disputes and Disruptions
 Heirs May Wish to Sell Their Shares to Company but
Company Does Not Offer a Fair Price
 Heirs May Wish to Sell Shares to Outsiders, Who May
Not Be Compatible with Other Owners
 Heirs May Decide to Retain Shares, but Lack Expertise
Needed to be Involved in Business

25. BUY-SELL AGREEMENTS
Value of Buy-Sell Agreements
 Prevent Disputes and Disruptions
 Good Succession-Planning Tools For Share Valuation
 Valuable Estate Planning Tools for Shareholders
The Basics
 Restrictions on Share Transfers
 Pricing Mechanism
 Method for Funding the Buyout

26. ADDITIONAL ASSET PROTECTION
CONSIDERATIONS
Equity Stripping
Consideration for Valuable Assets (i.e. Inventory, Equipment,
Patents, Trademarks, Accounts Receivable)
 Protect By Stripping Assets of Their Equity
 Borrow Against Asset; Give Another Party a Lien for the Debt
 Create LLC to Reduce Chance of All owners Being Debtors of
Common Creditor
 Lease-back Arrangements
Benefit
 Control and Enjoyment of Asset; Less Tempting for Creditors
Caveat
 Fraudulent Transfers
 Tax considerations

27. Questions?
Anthony J. Madonia, Founder
Anthony J. Madonia & Associates, Ltd.
233 S. Wacker Drive, Suite 6825
Chicago, IL 60606-1609
312-578-9300