Estate Planning for the Family-Owned Businessmedia.straffordpub.com/products/estate-planning... · 11/27/2012 · Why Important--Today's business owners want to get out of town!

Estate Planning for the Family-Owned Business Effective Strategies for Business Transfer Through Inheritance, Gift or Sale

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

TUESDAY, NOVEMBER 27, 2012

Presenting a live 110-minute webinar with interactive Q&A

John H. Brown, President, Business Enterprise Institute, Golden, Colo.

Nicholas K. Niemann, Shareholder, McGrath North Mullin & Kratz, Omaha, Neb.

Timothy Scott, Director, Wallace Scott, Denver, Colo.

Sound Quality

If you are listening via your computer speakers, please note that the quality of

your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory and you are listening via your computer

speakers, you may listen via the phone: dial 1-866-961-9091 and enter your PIN

when prompted. Otherwise, please send us a chat or e-mail

[email protected] immediately so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

For CLE purposes, please let us know how many people are listening at your

location by completing each of the following steps:

• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the SEND button beside the box

FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

5

Estate Planning for the

Family-Owned Business

John H. Brown CEO

Business Enterprise Institute, Inc.

Nicholas K. Niemann Shareholder

McGrath North Mullin & Kratz

Timothy Scott Director

Wallace Scott

Copyright 2012 Business Enterprise Institute. All Rights Reserved

6

• Business Owner Demographics.

• Outline of Exit Planning Process.

• Estate Planning and Business Continuity Planning in Context of Exit Planning.

• Opportunities for Estate Planners in Exit Planning Arena.

Today's Topic Outline

7

Why Important--Today's business owners want to get out of town!

“…47% of middle-market business owners 55 years and older are interested in selling their businesses within three years and yet over 90 percent of business owners have not initiated the planning process”

Bain Surveying Inc. Survey Sept. 11, 2008

8

Business Owner Market: Exit Plan Paths

Business Owner Market: When owners do plan exit path choices

Third party 29%

Key Employee(s), Co-Owner,

ESOP 41%

Child / Children 24%

Other 6%

Source: Business Enterprise Institute, Inc. Member Survey 2011


9

Less Than $2Million $2 Mil - $10 Mil

$10 Mil +

16.30%

48.15%

35.56%

Business Owner Market: Business Value

Source: Business Enterprise Institute, Inc. Member Survey 2011


10

Owner Demographics

6.2%

Celebrity

Wealth

2.9%

Inherited

Wealth

14.7%

Corporate

Wealth

76.2%

Equity/Post Equity

Wealth

Figure 3:

Source of Private Jet Owner Wealth

N= 956 Individuals Source: The Family Office: Advising the Financial Elite (2010)

11

The Exit Process

The Seven Step Exit Process™

Step 1 – Identify Exit Objectives

Step 2 – Quantify Business and Personal Financial Resources

Step 3 – Maximize and Protect Business Value

Step 4 – Ownership Transfer to Third Parties

Step 5 – Ownership Transfer to Insiders

Step 6 – Business Continuity

Step 7 – Personal Wealth and Estate Planning


12 Copyright 2012 Business Enterprise Institute. All Rights Reserved

13

Estate Planning For The Family – Owned

Business

Presented by:

Nick Niemann, JD McGrath North Law Firm Omaha, Nebraska

Presented for:

Strafford Publications November 27, 2012 Program

Copyright 2012 Nicholas K. Niemann. All Rights Reserved

Copyright 2012 Nicholas Niemann, JD. All Rights Reserved

14

During The “Fourth Quarter” of a Family Business Owner’s Tenure

- He or She Faces Vastly Different Internal and External Family, Business and Financial Dynamics

First

Half

Second

Half


Business Owner’s Life Cycle (Tenure) First Half Second Half

1st

Quarter 2nd

Quarter 3rd

Quarter 4th

Quarter 2 Minute Warning

Main Feature

Start Build Grow Transition

(or Decline) Exit

Common Owner Goals

Be Successful / Make A Profit Stay Successful / Make A Difference

Common Owner Mindset

“Bring It On!” “Well … Let’s Think About That”

Common Key Employee Mindset

“Let’s Get On This Ride!” “When Do I Get To Drive?”

Common Family Member Mindset

“I’d Like To Work For The Family Business Someday.” “I Should Get To Be CEO.”

Succession & Exit Planning

Copyright 2012 Nicholas Niemann, JD. All Rights Reserved 15

Changing Dynamics – In

“Fourth Quarter” • Owner • Business Model

• Spouse • Opportunities

• Children • Estate Planning

• Customers • Investments

• Successor • Financial Planning

• Key Employees • Life Insurance

• Banker • Disability Insurance

• Partners • LT Care Insurance

• Community • Legacy


What “Fourth Quarter” Issues Do You and I See Every Day …

Pete’s Story Failed to grow & protect business.

Carla’s Story Lack of proper family or partner buy-sell control led to control issues.

Patty’s Story Failed to develop family leadership or other management depth.

Tim’s Story Family disputes or financial issues lead to business disruption.


18

The 12 Business Owner “Fourth Quarter” Mistakes

1. Conflicting

Objectives

IR

S

2.

4.

3. 11.

10.

9.

8.

7.

6.

5.

12. Misjudging

True Value

Wrong

Estate Plan

Partner

Disputes

Lawsuit

Losses

Wrong

Inside

Exit

No Capable

Successor Wealth

Mismanage-

ment

Company

Not Ready

Tax Cost

Business

Model

Burnout

Wrong

Outside

Exit


19

The 12 “Fourth Quarter” Actions

1.

2.

4.

3. 11.

10.

9.

8.

7.

6.

5.

12.

Decide Protect Grow Prepare Exit


20

1. Legacy

Blueprint

2.

4.

3.

11.

10.

9.

8.

7.

6.

12.

Business

Owner

Estate Plan

Business

Protection

Plan

Family

Wealth

Plan

Leadership

Succession

Plan

Company

Readiness

Plan

Integrated

Tax Plan

Inside

Route

Exit Plan

Outside

Route

Exit Plan

Value

Enhancement

Plan

Via Outside

Route …

5.

Via Inside

Route …

My Business …

My

Management …

Owner

Fitness

Report

What I Want …

What I’ve Got …

My Family …

My Business …

My Ownership …

My

Investments …

Ownership

Protection

Plan

My Company …

My Tax

Initiatives …


- Will Discuss Just 4 Today -



21

1.

2.

4.

3.

11.

10.

9.

8.

7.

6.

5.

12.

Business Owner Estate Plan

My Family …




22

Business Owner Estate Plan Provisions

“Sweat” Equity Allocation

Dispute Resolution

Financial Resource Reserve

Family Council

Business Key Person Life Insurance

Business Buy-Out Life Insurance

Special Bequest to Business-Active Children

Non-Active Children Equalization

Family Business Representative

Business Sale Instructions

Successor CEO

Contingency Plan Notifications


23

1.

2.

4.

3.

11.

10.

9.

8.

7.

6.

5.

12.


Business Protection Plan

My Family …

My Business …




24

Contingency Notification Letters

Contingency Press Release

Contingency Resolutions

− Letter to Family

− Contingency Shareholder Resolutions

− Contingency Board of Director Instructions

− Contingency Sale Plan Instructions

Stay Bonus Plan

Disaster Succession Plan

One Component of the Business Protection Plan is …


25

1.

2.

4.

3.

11.

10.

9.

8.

7.

6.

5.

12.


Business Protection Plan

Ownership Protection Plan

My Family …

My Business …

My Ownership …




26

Stock Transfer Restrictions

Estate Plan Transfers

Death

Total Disability

Termination of Employment

Bankruptcy

Divorce

Texas Shootout

Drag Along

Tag Along

Trigger Price

Voting

Taxable Estate Value

Windfall

Covenant Not To Compete

Non-solicitation

Funding

Buy-Sell Agreement


27

Board Approval Actions

Right to Engage In Competing Businesses

Confidentiality Provisions

Required Resignation

Financial Statement Requirements

Subchapter “S” Protection

Tax Payment Dividends

Stock Redemption Provisions

Annual Dividend Payments

Business Continuity Agreement

Non-Solicitation of Customers

Non-Solicitation of Employees

Board of Director and Officer Compensation

Job Retention Guidelines

Family Employment Policy

Advisory Board

Corporate Formalities

Conflict of Interest Policy


28

1.

2.

4.

3.

11.

10.

9.

8.

7.

6.

12.

Business

Owner

Estate Plan

Business

Protection

Plan

Inside

Route

Exit Plan

Via Inside

Route …

5.

My Family …

My Business …

My Ownership …

Ownership

Protection

Plan




29

Inside Route Choices Exit Routes Exit Method

Management Buyout (MBO)

Leveraged Management Buyout (LBO)

Stock Option/Purchase

Stock Bonus/Purchase

Employee Stock Ownership Plan

Part Sale/Part Gift

Lifetime Gifts

Grantor Trust (e.g. “IDGT” or Dynasty)

Grantor Retained Annuity Trust

Installment Sale

Inheritance

Negotiated Sale

Buy-Sell Agreement “Put”

Texas Shoot Out

Right of First Refusal

Event Trigger (Death, Disability)

Negotiated Sale

Key Employee

Group

Family Members

Co-Owners


30

Inside Route Exit Plan (Example) The Two Step Inside Transfer:

Step 1 – Sell (and/or Bonus) up to ________% to One or More Family or

Other Key Person(s) At This Time.

Step 2 – Keep the Following Options For Later:

Keep my remaining stock for now (e.g. possibly until death)

Sell the balance to key persons in installments

Sell to new key persons in the future

Sell balance to an ESOP

Sell balance to key persons at my retirement for cash

Sell balance to key persons at my retirement for a financial package

Sell to an outside third party

Re-purchase stock from key person (e.g. upon employment

termination Copyright 2012 Nicholas Niemann, JD. All Rights Reserved

31


1. Legacy

Blueprint

2.

4.

3.

11.

10.

9.

8.

7.

6.

12.

Business

Owner

Estate Plan

Business

Protection

Plan

Family

Wealth

Plan

Leadership

Succession

Plan

Company

Readiness

Plan

Integrated

Tax Plan

Inside

Route

Exit Plan

Outside

Route

Exit Plan

Value

Enhancement

Plan

Via Outside

Route …

5.

Via Inside

Route …

My Business …

My

Management …

Owner

Fitness

Report

What I Want …

What I’ve Got …

My Family …

My Business …

My Ownership …

My

Investments …

Ownership

Protection

Plan

My Company …

My Tax

Initiatives …



32

Are Your Client’s Chances of A Successful Plan Fading Away?

(And he or she just doesn’t realize it … yet?)


33

- Systematic

- Repeatable

- Used Nationally In Multiple Business Sectors

The Next Move ProgramTM

- Adaptable

- Customized

How We Work With

• Business Owners

• Their Advisors


34

Questions

Comments

Discussion

THANK YOU!


35

Disclaimer This presentation should not be considered as legal, tax, business or financial advice. This presentation is designed to provide information about the subject matter covered. It is provided with the understanding that while the speaker/author is a practicing transition and exit advisor, neither he nor his firm has been engaged by the attendee/reader to render legal or other professional services (unless a specific engagement agreement has been executed). If legal advice or other expert assistance is required by the attendee/reader, the services of a competent professional should be sought.

Circular 230 Disclosure The following statement is required by the U.S. Treasury Department Regulations: Any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed here.

Estate Planning For The Family – Owned Business

Presentation Notice

Copyright 2012 Nicholas K. Niemann. All Rights Reserved Copyright 2012 Nicholas Niemann, JD. All Rights Reserved

36

ESTATE PLANNING FOR THE FAMILY-OWNED BUSINESS

TOOLS AND TECHNIQUES

PRESENTED BY: TIM SCOTT

WALLACE SCOTT, PC

Copyright 2012 Wallace Scott, PC. All Rights Reserved

37

DISCLAIMER

THESE MATERIALS ARE NOT INTENDED OR WRITTEN BY THE AUTHOR TO BE USED, AND THEY CANNOT BE USED BY YOU (OR ANY OTHER TAXPAYER) FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU (OR ANY OTHER TAXPAYER) UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.


38

ESTATE AND GIFT TAX ENVIRONMENT

2012

• $5.12 MILLION ESTATE AND GIFT EXEMPTION (UNIFIED)

• SPOUSAL PORTABILITY

• 35% TAX RATE

2013

• $1 MILLION ESTATE AND GIFT EXEMPTION

• SPOUSAL PORTABILITY?

• 55% TAX RATE


39

CORE STRATEGIES

TRANSFERRING VALUE OUT OF ONE’S ESTATE

• GRANTOR TRUST PLANNING

• CHARITABLE TRUST PLANNING

UTILIZING VALUATION DISCOUNTING AND MAINTAINING A DEGREE OF CONTROL

• FAMILY LIMITED PARTNERSHIP

• BENEFICIARY DEFECTIVE TRUST

PROTECTING VALUE

• DOMESTIC ASSET PROTECTION TRUST (IN ADDITION TO OTHERS)


40

TRANSFERRING VALUE: GRAT

GRANTOR RETAINED ANNUITY TRUST

AN IRREVOCABLE TRUST WHEREBY:

• THE GRANTOR IS THE OWNER OF THE TRUST FOR INCOME TAX PURPOSES

• THE GRANTOR TRANSFERS ASSETS TO THE GRAT IN EXCHANGE FOR THE RIGHT TO RECEIVE ANNUAL ANNUITY PAYMENT FOR A TERM OF YEARS

• AFTER TERM OF YEARS, ASSETS IN TRUST ARE EXCLUDED FROM THE GRANTOR’S ESTATE

• GAMBLES: ASSETS IN TRUST APPRECIATE HIGHER THAN THE “7520 RATE,” AND THE GRANTOR SURVIVES THE GRAT TERM


41

Grantor Retained Annuity Trust

Transfer Some Stock To “Grantor Retained Annuity Trust” (“GRAT”)

2012 2017 – 20 +/-

TRANSFER OF STOCK

TO TRUST

ANNUITY PAYMENT

FOR X YEARS

Benefit: Move Most of

5 – 10 Year Growth

Out of Owner’s Estate

GRAT

STOCK TRANSFER

AFTER ANNUITY ENDS

FAMILY

BUYER YOU

SELL

COMPANY

SELL

COMPANY

YOU


42

TRANSFERRING VALUE: IDGT

INTENTIONALLY DEFECTIVE GRANTOR TRUST

AN IRREVOCABLE TRUST OF WHICH:

• THE GRANTOR IS THE OWNER OF THE TRUST FOR INCOME TAX PURPOSES

• THE GRANTOR IS NOT THE OWNER OF THE TRUST FOR GIFT, ESTATE OR GST TAX PURPOSES


43

TRANSFERRING VALUE: IDGT

A PART SALE - PART GIFT TRANSACTION WHERE:

• THE GRANTOR CREATES THE IDGT

• THE GRANTOR FUNDS THE IDGT WITH AN AMOUNT AT LEAST EQUAL TO 10% OF AMOUNT TO BE PURCHASED THOUGH A DEFERRED PAYMENT OPTION

• THE GRANTOR SELLS ASSETS TO THE IDGT IN EXCHANGE FOR A DEFERRED PAYMENT OPTION (PROMISSORY NOTE)

– PROMISSORY NOTE - FLEXIBLE TERMS, INTEREST RATE MUST BE AT LEAST THE APPROPRIATE APPLICABLE FEDERAL RATE, UNPAID BALANCE OF NOTE IN ESTATE UPON DEATH; CERTAIN INCOME TAX ISSUES UPON DEATH


44

Defective Grantor Trust

“Sell” Some Stock To “Intentionally

Defective Grantor Trust” (“IDGT”) 2012 2017 – 20 +/-

“SELL” STOCK

TO TRUST

PROMISSORY NOTE

Benefit: Move Most of

5 – 10 Year Growth

Out of Owner’s Estate

IDGT

TRANSFER STOCK

AFTER NOTE IS PAID

FAMILY

BUYER YOU

SELL

COMPANY

SELL

COMPANY

YOU


45

TRANSFERRING VALUE: CHARITABLE REMAINDER TRUST

AN IRREVOCABLE SPLIT-INTEREST TRUST BENEFITING NON-CHARITABLE AND CHARITABLE BENEFICIARIES THAT:

• PAYS NO INCOME TAX ON ITS INCOME.

• PAYS AN AMOUNT OF INCOME AND/OR PRINCIPAL TO THE NON-CHARITABLE BENEFICIARY FOR ITS TERM.

• PAYS THE REMAINDER TO CHARITABLE BENEFICIARY AT THE END OF CRT TERM.

• PROVIDES INCOME, GIFT, ESTATE AND GENERATION-SKIPPING TRANSFER TAX CHARITABLE DEDUCTION TO GRANTOR UPON CREATION AND FUNDING.


46

TRANSFERRING VALUE: CHARITABLE TRUST VARIATIONS

• CRAT

• CRUT

• CLT

• PRIVATE FOUNDATION


47

VALUATION DISCOUNTING/CONTROL: THE FAMILY LIMITED PARTNERSHIP

ESTATE PLANNING TOOL TO TRANSFER FAMILY BUSINESSES, REAL ESTATE INTERESTS AND INVESTMENT ASSETS FROM ONE GENERATION TO SUCCEEDING GENERATIONS IN A STRATEGIC MANNER TO MEET SPECIFIC FAMILY SITUATION.


48

VALUATION DISCOUNTING/CONTROL: WHY THE FAMILY LIMITED PARTNERSHIP?

• ACCUMULATION OF WEALTH

• FAMILY TRAINING IN MANAGEMENT AND GROWTH OF ASSETS

• STATE TAXES/INCOME TAX FLEXIBILITY

• VALUATION DISCOUNT

• CONSOLIDATION OF ASSETS

• ASSET PROTECTION - INSIDE AND OUTSIDE OF FAMILY LIMITED PARTNERSHIP

• SEPARATE PROPERTY MAINTENANCE/PRE-MARITAL PLANNING

• CONTINUITY OF MANAGEMENT

• CONTROL


49

IRS ATTACKS

• NO BONA FIDE PARTNERSHIP FORMED UNDER STATE LAW

• ALTER EGO

• RETAINED LIFE ESTATE (IRC SECTION 2036)

• AGGRESSIVE VALUATION DISCOUNTS

VALUATION DISCOUNTING/CONTROL: WHY THE FAMILY LIMITED PARTNERSHIP?


50

VALUATION DISCOUNTING/CONTROL: THE BENEFICIARY DEFECTIVE TRUST

AN IRREVOCABLE TRUST WHERE:

• THE GRANTOR SEEDS THE TRUST

• THE BENEFICIARY (CLIENT) PAYS THE INCOME TAX ASSOCIATED WITH TRUST ASSETS

• BENEFICIARY = INVESTMENT TRUSTEE

• USE IN COMBINATION WITH AN INSTALLMENT SALE, CAN SELL ASSETS TO THE BDT WHILE BENEFICIARY REMAINS IN INVESTMENT CONTROL


51

PROTECTING VALUE: DOMESTIC ASSET PROTECTION TRUST

AN IRREVOCABLE TRUST HAVING THE FOLLOWING ATTRIBUTES:

• SELF-SETTLED SPENDTHRIFT TRUST

• WHICH JURISDICTION?

• FACTORS: STATE INCOME TAX, CREDITOR STATUTE OF LIMITATIONS


52

CONCLUSION

• MANY TECHNIQUES AVAILABLE TO SHIFT AND OTHERWISE PROVIDE AN ORDERLY SUCCESSION REGARDING THE FAMILY BUSINESS

• USE IN COMBINATION WITH PROTECTING VALUE OF WEALTH

• USE AS PART OF THE OVERALL EXIT PLAN TO ENSURE WEALTH IS HANDLED EXACTLY AS INTENDED

• TIME TO EVALUATE, IF NOT DONE ALREADY, IS NOW


53

Open-Ended Questions – Business Owners

As you transfer your ownership/interest have you given any thought to:

• What does the future of your business look like after you have left it? • Where are you today? • Where do you want to be?

• What is the plan for your children/your grand children?

• Have you given thought to protecting the value your creating from

future creditors including ex spouses?

• Have you considered the tax cost of transferring wealth to your family as you exit your business?


54

Thank You!

John H. Brown, CEO

Business Enterprise Institute, Inc.

741 Corporate Circle, Suite J

Golden, CO 80401

(888) 206-3009

[email protected]

www.exitplanningforadvisors.com

Nicholas Niemann, Shareholder McGrath North Mullin & Kratz, PC LLO

1601 Dodge Street First National Tower STE 3700 Omaha, NE 68102

(402) 341-3070

[email protected]

http://www.mcgrathnorth.com

Timothy Scott, Director

Wallace Scott Law

Sussex Building - Larimer Square 1430 Larimer Street, Suite 208

Denver, CO 80202

(303) 586-1850

[email protected]

http://www.wallacescottlaw.com

Copyright 2012 Business Enterprise Institute, Wallace Scott Law, Nicholas Niemann, JD. All Rights Reserved

mailto:[email protected]

http://www.exitplanningforadvisors.com/


http://www.mcgrathnorth.com/


http://www.wallacescottlaw.com/

Documents

Estate Planning for the Family-Owned Businessmedia.straffordpub.com/products/estate-planning... · 11/27/2012 · Why Important--Today's business owners want to get out of town!