Getting the business prepared for transition, with a focus on estate and tax considerations.

1. GETTING THE BUSINESS PREPARED
FOR TRANSITION – ESTATE AND TAX
CONSIDERATIONS
Presented By:
Anthony J. Madonia
Alliance of Merger and Acquisition Advisors
July 23, 2014
233 S. Wacker Drive, Suite 6825
Chicago, IL 60606-1609
312-578-9300
312-578-9303 (fax)

2. ANTHONY J. MADONIA
o Founder and President of Anthony J. Madonia & Associates, Ltd., a law
and tax advisory firm located at the Willis Tower, 233 S. Wacker Drive –
Suite 6825, Chicago, IL.
o Tony is an Attorney and Certified Public Accountant who focuses in the
areas of Estate Planning and Administration, All Aspects of Business
Planning from Start to Finish, Corporate Law, and Taxation.
o Tony has a Bachelor of Arts degree in Accounting from the University of
Illinois and a Juris Doctorate from John Marshall Law School.
o He teaches Estates & Trusts and Estate Planning & Drafting as an adjunct
faculty member at John Marshall Law School.
o He is a member of the American Bar Association, the American Association
of Attorney-CPAs, and the Justinian Society of Lawyers.
o He has served as Chairman of the Asset Protection Committee of the
Chicago Bar Association.

3. TAXES GENERALLY DUE UPON SALE
o Capital Gains Tax:
oExcess of the amount realized over the adjusted cost basis
oFederal tax rate of up to 23.8%
o Recapture of depreciation:
oTaxed as ordinary income
o Implications:
oLiquidity problems as the taxes are due at one time
o Can move the seller into a higher tax bracket, further
increasing taxes and reducing the value of deductions

4. ESTATE AND TAX CONSIDERATIONS
o Transfers of business interests to family members
oOutright gifts
oIrrevocable trusts for the benefit of children
oFamily limited partnerships
o Use of Irrevocable Life Insurance Trusts
o Use of Charitable Remainder Trusts

5. TRANSFERS OF BUSINESS INTERESTS
TO FAMILY MEMBERS
o If one of your goals is to move a portion of the value of
the business to future generations, estate planning
should be done at an early stage.
o Want to move interests from selling entity for the
benefit of future generations when values are low.
o In this way, you can make sure the future generations
receive the benefits of the sales proceeds when an asset
or stock sale is completed, while keeping that asset
outside of your taxable estate.

6. TRANSFERS OF BUSINESS INTERESTS
TO FAMILY MEMBERS
o Lifetime gift tax exclusion of $5.34 million ($10.68
million for a married couple)
o $14,000 annual exclusion
oAllows you to give $14,000 ($28,000 for a married
couple) in cash or other assets each year to as many
individuals as you choose
o Current economic and political climate does not give
certainty to future exclusion or tax rate
o Can make tax free annual gifts of shares of the family
business to children

7. TRANSFERS OF BUSINESS INTERESTS
TO FAMILY MEMBERS
o What if you would like to gift more than either the
annual or lifetime exclusion?
o Consider valuation discounts
oBecause of less control and liquidity associated with
shares of a closely owned business, these gifts can be
valued at a significant discount.
o Thus, even large gifts of shares may be able to fit within
the lifetime gift exemption.

8. TRANSFERS OF BUSINESS INTERESTS
TO FAMILY MEMBERS
o Another option is to set up an irrevocable trust for the
benefit of your children
o In this way, the shares are not included in the business
owner’s estate
o The children are able to take advantage of any
appreciation of the shares without gift or estate tax
o Consider an Intentionally Defective Grantor Trust

9. TRANSFERS OF BUSINESS INTERESTS
TO FAMILY MEMBERS
o Intentionally Defective Grantor Trusts
oThe trustmaker forms and gifts assets to an irrevocable trust that
will likely appreciate substantially in the future.
oThe trustmaker retains powers over the trust and any income
earned by the trust is taxable to the trustmaker rather than the trust
or its beneficiaries.
oAn intentionally defective trust is one which is defective for income
tax purposes so all income is taxed to trustmaker.
o Benefits:
oThe trustmaker’s estate is significantly minimized for tax purposes.
oThe value of the property in the trustmaker’s estate is frozen and all
appreciation will pass to the trust beneficiaries without gift or estate
tax
oThe trustmaker can retain control over the business.

10. TRANSFERS OF BUSINESS INTERESTS
TO FAMILY MEMBERS
o Family Limited Partnerships
oThe general partner contributes business interests to the partnership
in exchange for partnership interests.
oThe general partner then gives all or a portion of their limited partner
interests to their children.
oGeneral partner retains control over assets.
o Tax benefits:
oReduces the taxable estate of the general partner.
oLimited partners have no right to control and limited liquidity so the
valuation of their shares can be discounted.
o Also has significant asset protection as creditors may not force
distributions to limited partners.

11. IRREVOCABLE LIFE INSURANCE
TRUSTS
o Business owners with a large net worth need to be
careful about how they structure buy-sell agreements.
o If their taxable estate (including fair market value of
business interests) puts them in jeopardy of paying estate
taxes, they might not want to purchase departing owner’s
interest.
o Instead, an owner could establish an irrevocable life
insurance trust to purchase it.

12. IRREVOCABLE LIFE INSURANCE
TRUSTS
o Business owner establishes an ILIT.
o ILIT trustee and other business owners enter into a buy-sell
agreement.
o Owner’s ILIT purchases life insurance policies on other owners.
o Owner provides funds for the ILIT trustee to pay premiums by
making gifts or loans to ILIT.
o Shareholder agreement provides for buyout by ILIT.
o At owner’s death, ILIT trustee receives proceeds and uses them to
purchase the ILIT’s shares of deceased owner’s interest.

13. IRREVOCABLE LIFE INSURANCE
TRUSTS
o Benefits:
oBusiness interest purchased by the ILIT is not included in the
owner’s taxable estate.
oProvisions of ILIT can be drafted to accomplish owner’s
objectives.
oBusiness owner increases his interest in the business by
arranging for it to be purchased and owned by an entity he created.
oUpon owner’s death, the ILIT can become the owner of his share
of the business, leading to the centralized management of the
business interest for his beneficiaries.

14. CHARITABLE REMAINDER TRUSTS
o How is it used?
oBusiness owner contributes ownership interests to the
charitable remainder trust, which is an irrevocable trust.
oThe CRT then sells this interest to a third-party buyer.
oThe CRT does not incur capital gains tax on the sale
transaction.
oThe CRT is left with cash, which it then pays to the owner and
the owner’s spouse for life.
oUpon the death of the owner and his spouse, the CRT
terminates and pays the remaining balance to charities.

15. CHARITABLE REMAINDER TRUSTS
o Biggest benefits:
oOwner receives a charitable deduction when he transfers assets to
the trust.
oWhen the CRT sells stock or other business interests, no capital
gains tax is paid, leaving more money for payout to trust
beneficiaries.
oThe trust itself is a tax-exempt entity and is not subject to tax.
oThe beneficiaries pay tax on the income distributions received from
the CRT.
oInterest in the trust is not included in the owner’s estate as it is a
life annuity.