Washington Estate Planning

Succession Planning – A Business Must

The conversation around successions can be [sensitive], because it brings up all the same issues one faces when starting a business — only this time, you’re forced to imagine it without yourself in the picture.

When it comes to business, succession is perhaps the most fundamental concept and object of planning. So, even though we realize that all beginnings will inevitably have an end, why is it so hard to talk about?

If business succession is on your mind then you will want to read a recent Forbes article titled “How to Succeed At Succession.” Before you read the original article, remember this – the questions are as important (if not more so) than the answers.

So, what kinds of questions should you be asking yourself? Here are a few to ponder:  Do you want the business to live on past you? Who ought to lead it? What is the business in the context of your own estate or the estates of your partners? Do you have an exit strategy in the event of retirement, disability or death?

Make sure you consult legal counsel with all parties involved in your business. In order to have peace of mind about “the end” of your business, you must take appropriate planning steps in “the  beginning.”

Reference: Forbes
(January 15, 2013) “How to Succeed At Succession”

When Business (Founding) Partners “Divorce”

How you go about handling the situation [of a business partnership
split-up] can mean the difference between an amicable split, where you run the
business as you see fit, and a messy divorce, in which you wind up losing
money, clients, resources or other critical assets.

In every end there is a
beginning. When it comes to the founders of a business, there also ought to be
an end. An amicable end.

As Stephen Covey noted so
adroitly, one of the keys to effectiveness is to “begin with the end in mind.”
Accordingly, the founders of a business should structure and run the business
with a clear commitment to their shared ultimate goals for themselves and their
business. In the vernacular of business planning, this oftentimes is called
“exit planning.”

If you fail to “begin with the
end in mind” and make legal plans to memorialize the end game for your personal
and business relationships, then you likely will only enrich lawyers. So, when
it comes time to part ways down the road, what steps should you be taking now?

The Wall Street Journal
recently addressed this subject in an article titled “Breaking Up (With a Co-Founder) Is Hard to
Do.”

One key takeaway from the
article is the “when and how” of exit planning. The best time to address the
issue is when the business is founded. Consequently, the best way to
memorialize the exit strategy in the event of the disability, retirement or death
of a founder is through various legal documents created when the business is
founded. For example, an Limited Liability Company (LLC) can use the LLC
Operating Agreement, while a corporation may use its Bylaws or various
Shareholder Agreements.

Regardless, one thing is clear:
do not bury your head in the sand. For every business, an “exit” will be
required. As a result, you can either make plans now, or leave it up to lawyers
to clean up (literally) later.

Reference: The Wall Street
Journal (September 22, 2012) “Breaking Up (With a Co-Founder) Is Hard to
Do”

Family Business Non-Succession?

The problems founders face when an heir
announces he/she refuses to reign are significant and extend far beyond the
hassle of hunting for a replacement in a 
poor quality applicant pool.  The
real damage done in this circumstance comes from what happens after the founder
aborts his retirement plans and attempts to change the mind of his/her child.

Succession of the family
business can be a fairly difficult transition for just about everyone involved.
This can be especially true for the heir apparent. What happens when the heir
pulls away or even outright rejects the business? Well, the transition gets
tougher still.

If you are a family business
owner, are you intending to keep the business in the family even as you step
down from control? Have you considered the possibility of designating an heir
who does not want the family business and do you have a “Plan B” to adjust your
succession plans accordingly? The reasons why an heir may resist taking up the
reins to the family business are many facetted, but that doesn’t necessarily
mean they are making a final, informed decision. No, it may take time, talk,
and some understanding, and there are lessons to be gleaned from a recent Forbes article on the subject titled “5 Ways Family Business Founders Can Change A
"Made Up" Mind.”

Perhaps it’s best to think of it
this way: when it comes to succession, your estate planning is simply no longer
just about your wishes, your hopes, or your dreams. Even if they are selfless,
everyone else has to do his or her own thinking and planning. This can take
patience, time and understanding.

Reference: Forbes
(September 10, 2012) “5 Ways Family Business Founders Can Change A
"Made Up" Mind”

Tax Time Bomb Ticking for Small Business Owners

Last week a colleague and I were discussing
a C Corporation with nearly three-quarters of a million dollars in retained
earnings, with owners who want to get the money out. The owners wondered about
any “fancy tax ideas.” My colleague immediately stated, “Yeah; distribute it.”
He was right. No muss; no fuss. Just sound advice.

Planning is one thing, but
taking action is another. Right now, when it comes to taxes, the time may be
right for small business owners to take action.

Forbes recently wrote an article titled, “Taxes are Low - Move it or
Lose It!,” explaining that taxes may take a turn for the worse – and
soon - once the calendar rolls over to 2013!

Right now capital gains and
dividend taxes max out at 15%. After the year’s end, however, these rates are
set to lapse and skyrocket to 23.8% on long-term capital gains and 43.4% on
qualifying dividends. So, what is a small business owner to do?

The original article in Forbes provides some practical actions
to take, including:

• 
  If you are selling all or part of your business,
  do it now.
• 
  If you have any qualifying dividends available
  for distribution, do it now.

What else should be done?
Certainly the original article offers some additional pointers, but the
specific actions depend on your unique circumstances.

Regardless, this is a perfect
time to schedule that consultation with your financial, tax and legal advisory
team, sooner rather than later.

Reference: Forbes (July
24, 2012) “Taxes are Low - Move it or
Lose It!”

Shark Attack Nearly Foils Succession Planning

Briggs never imagined he would need another succession plan so quickly. If the shark had killed him, his clients and employees would have been left out in the cold. His wife would likely not have realized any of the value of the practice he had built up over 15 years, he says.

Sometimes it takes a shark attack to get someone's attention. For the rest of us, however, the threat threshold shouldn't be so high. This is especially true when planning for your business succession.

So even if you never get much closer to sharks than a screening of Jaws, there's something to learn from the story of someone who survived the attack and went on to ensure the survival of his business. This tale was recounted in a recent issue of Financial Advisor Magazine titled "Succession Survival Guide."

Meet Max Briggs, CEO of FLC Capital Advisors and a business owner with a penchant for skin diving in dangerous waters. Nine months before his shark encounter, Briggs set up a succession plan with his business partner. Thereafter, his partner passed away at age of 42 and the buy/sell agreement provision in the succession plan kicked in. Not only did the arrangement save the business, but the plans also had not been reset before Briggs took his ill-fated dive. As a result, had he not survived the shark attack, the business would have fallen apart.

Even if you don't spear fish or run an investment firm like Briggs, the need to make proper succession plans is universal. Without proper planning, your business (and any personal family wealth) could collapse.

What proper succession planning will mean for you and your business will vary given your unique circumstance, however, it is worth dedicating some time and energy into building a viable plan.

Reference: Financial Advisor Magazine (June 2012) "Succession Survival Guide"

Good News For Transferring Business Interests

The Tax Court has just passed a new technique
that closely-held businesses owners —and wealthy families — can use to pass
assets to heirs with a minimal amount of taxes and complications. The ruling in
the case, Wandry
v. Commissioner,
is stirring up excitement among experts.

Just between us, isn’t it nice
when the IRS loses a case to a taxpayer? For example, the little-guy victory in
the landmark case of Wandry v.
Commissioner affirms and simplifies a very powerful tool for passing on
wealth, especially for the business owner.

While the case and the estate
planning tool in the crosshairs have been the subject of previous articles, The Wall Street Journal provided a new
explanation of the two in an article appropriately titled “Shielding the Family Business.”

The basic plan for wealth
transfer when there is a business involved is to give it in pieces, and that’s
precisely the plan that benefits from Wandry
v. Commissioner. Giving away the entire business outright is a good way to
take a tax hit, since it will invoke a gift tax when you cross certain thresholds
during the year and in your lifetime.

There’s currently a lifetime
exemption of $5.12 million and an annual exclusion of $13,000. Nevertheless,
it’s easy for a business to be worth more than $5.12 M, and using that
exclusion in full will drain what you have available against the estate tax
later at death. However, by their very nature and structure, business interests
are especially amenable to piecemeal ownership transfer. This is because
ownership of the business, and therefore the underlying assets owned by the
business, is an abstraction, and you can simply gift your interests in the
business without a tax hit. For example, you can chip away by giving a usefully
small amount, say, $13,000 per year per individual (or whatever number Congress
and the IRS set for that year), without gift taxes.

Of course, gifting business
ownership is not entirely ideal. Fortunately, that’s what the Wandry v. Commissioner case tries to fix.
Gifting exactly $13,000 is pretty easy by simply writing out the figures and
name on a check. On the other hand, with an abstraction like business ownership,
the gift depends on the value of the business and, more to the point, on the
value that you and the IRS agree or disagree about.

If you give $13,000 of ownership
on the basis of your valuation, but the IRS adds up $15,000 based on its own
valuation, then the IRS might also think you owe a tax (or, alternatively, that
your gift/estate tax exemption should erode by that much). As you might have
guessed, that’s exactly what happened in the Wandry case. Unfortunately
for the IRS, the court held that the Wandrys had clearly intended to give their
annual exemption amount and, if there is a new appraisal and higher valuation
of the gift, then the excess wasn’t intended to be gifted in the first place.

Obviously, there is much more to
this case and more guidance to be gleaned for the business owner. I would
recommend reading the original article if you are or will be transferring
interests in your business. As always, make sure you engage qualified legal
counsel before taking action.

Reference: The Wall Street
Journal (April 30, 2012) “Shielding the Family Business”

Business Succession: Is 2012 The Year?

“I’ve heard recently about the federal gift
and estate tax window of opportunity for asset transfer, and was wondering if
that impacts succession planning. Will there be greater tax benefits for me to
leave the business in 2012, rather than 2013?”

Success in business is often
dependent on good timing. Business owners time the market, time their sales,
time their marketing, time their expansion, and just about everything else. Logically,
then, succession planning for your business requires careful timing.

A recent article in
Businessweek, titled Family
Businesses Should Plan Now for Rising Gift Tax, took up the matter of
succession timing. In fact, the timing component of succession planning may be
more important now than in recent times, especially given the state of gift and
estate laws. The current exemptions and rates were the fruit of the “great
compromise” between the White House and Congress at the end of 2010. The
compromise created a lifetime gift tax of $5.12 million (adjusted for
inflation) for 2012, but only guaranteed that amount until the end of 2012.

As a result, if you want to transfer
large assets – like a business – then 2012 may be the year. The current $5.12
million will default to $1 million at year’s end, unless the White House and
Congress agree to retain the current exemption.

So 2012 may be the year – perhaps
the last year – to transfer large assets with such a generous tax exemption. Depending
on the value of your business, 2012 may be the year to make your move. This is
especially true if your business is valued at more than $1 million and would be
at risk were the laws were to sunset.

Of course, as a general rule of
thumb, it is oftentimes easier (and more efficient) to transfer a business
incrementally since, if nothing else, it can be monitored and protected at each
stage.

In the end, be sure to engage competent
counsel before taking action. There are some very complex issues that need to
be considered, to include valuing the business itself, structuring the transfer
and a very open tax issue regarding a potential “clawback” in the future.

This is not a DIY project.

Reference: Bloomberg Businessweek (March 19, 2012) “Family
Businesses Should Plan Now for Rising Gift Tax”

Small Business Owner Retirement Perspectives

Retirement plans have their place, but many entrepreneurs starve their business of needed working capital by putting money instead into tax-deductible accounts such as traditional 401(k)s. They think they are saving taxes.

Small business owners, by and large, have a hard time thinking beyond their business. It is a significant part of their very lives. If you are a small business owner, now may be the time to start thinking of your business as its own retirement vehicle, at least according to a recent guest columnist over at Forbes.

For retirement planning, a business owner typically has to take out of the business what would otherwise be capital for growth. You’re taking it out to put into a tax advantaged plan like a 401k, hoping it will grow there enough to make up for the taxes to be paid later. In addition, you are doing so in the belief that you’ll be in a lower tax bracket when you call upon those funds later on. But what are the returns on that account? It may be that a properly capitalized company will give far greater returns.

According to the Forbes article, a small business owner has to exist in a couple capacities, and the self that is an “individual” cannot be eclipsed by the self that is the “business owner,” nor the other way around. Ideally, perhaps, they can work in a synergy.

It is a risky strategy, especially for those nearing retirement, but it may be worth looking into the original article’s numbers.

Reference: Forbes (January 25, 2012) “Fund Your Business Before You Stuff  Retirement Accounts”

Small Business “Smoke And Mirrors”?

The government’s top official charged with advocating for small business is now a member of the White House cabinet, President Obama announced.

There’s a lot of movement on Capitol Hill these days, or at least there is the potential for it, and it’s largely in the name of small business. President Obama has recently expanded his cabinet with the addition of the chief of the Small Business Administration (SBA). 

Is it going to work for you?

As reported here in Businessweek, and in many places beyond, President Obama has launched an initiative to reorganize and condense six of the agencies responsible for various segments of the economy, not least of which being the SBA.

There is still concern that it may end up being a largely symbolic gesture, and perhaps also only a pre-election “political move.”

So, how will it affect you?

According to Robb Mandelbaum over at the New York Times, the reaction is mixed amongst small business persons.

Reference: Bloomberg Businessweek (January 13, 2012) “Obama Makes SBA Chief a Cabinet Member”

Selling Your Family Business with The Tax Wind At Your Back

There is a pent-up pipeline of owners who have had to put off selling in recent years because of the economy. And now that many of these companies have at least one year of profits on the books, they are more attractive to potential investors.

Whether we’re coming out of the recession is still very much in debate. Nevertheless, at least for some small businesses, the balance sheets are starting to look a bit better.

Having weathered the storm, some business owners are now ready to get out. According to a recent New York Times article, 2012 is going to be the time to sell the business for some owners.

“Buy low, sell high” is conventional market wisdom. To some business owners coming out of the rut with a good year behind them, right now may be the “high sales” they’ve been awaiting. Yet for some investors right now may still be the “low buys” with an eye for growth.

Behind the scenes, however, there’s more than simple market dynamics afoot in 2012. As you may recall, it also is the last year of the Bush-era tax cuts as they were extended only until the end of 2012.

So, if you’re looking to sell the business, then 2012 will offer a lower capital gains tax rate, at 15% instead of the 20% slated to fall into place come next January.

If your business IS your personal wealth, then this is real money for your future and for your family’s future.

Why are you waiting? Unless you intend to keep you family business in the family, the tax planets are beautifully (albeit temporarily) aligned with those same Bush-era tax cuts in place – and the generous Gift and Estate tax levels.

Accordingly, I recommend a consultation with your trusted accounting, legal and financial advisors without delay.

Reference: The New York Times (December 21, 2011) “Why Some Business Owners Think Now Is The Time To Sell”