Handing it Over: Closely-Held Business Succession & Estate Planning Cristin C. Keane, J.D., LL.M. Florida Bar Board Certified in Tax Law

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1 Handing it Over: Closely-Held Business Succession & Estate Planning Cristin C. Keane, J.D., LL.M. Florida Bar Board Certified in Tax Law Carlton Fields Jorden Burt, P.A

2 Handing it Over: An Overview When a closely-held business is an individual s primary asset, estate and succession planning issues can be daunting. Key issues to consider: Can/should the business continue after the owner s retirement or death? Is the owner willing to give up control? Does the owner have a partner or other individual willing and able to take over the management and/or ownership of the business? Do any of the owner s heirs want to own the business? Are the heirs going to be treated equitably? Does the owner have existing buy-sell agreements? Is the value of the business going to create a transfer tax liability? Is the business structured in a way that makes transfers difficult? Is there a market for the business? 2

3 Handing it Over: Avoiding Estate Taxes If the value of the business is likely to result in an estate tax liability, consider estate planning techniques to reduce the tax burden and help increase the estate s liquidity. Structure ownership to take advantage of discounts Make lifetime gifts Implement estate planning techniques designed to optimize the value of a gift or sale while reducing overall tax burden: e.g., sales to ESOPSs, gifts to GRATs, installment sales to IDGTs, low-interest intra-family installment sales, and sales using SCINs Structure estate plan to take advantage of post-mortem estate tax elections Use life insurance for liquidity needs, income replacement, and/or as another asset of the estate Include charitable giving as part of the estate plan 3

4 Getting Out: Selling the Business If the owner does not intend to pass the business on to an heir or partner, he or she can try to liquidate the business interest. Is there a market for the business? Timing is key Sell the business either directly or through a business broker Structure of the sale: Pre-sale income and estate tax planning Asset vs. stock sale Lump sum vs. installment payments Salary Earn-outs 4

5 Getting Out: Buy-Sell Agreements If the owner already has a co-owner (or creates a co-ownership as part of the estate plan), then, regardless of entity type (corporation, LLC), the owners should have a buy-sell agreement that could include: Management/deadlock provisions Transfer restrictions Buy-out rights/requirements involuntary transfers, death, disability termination of employment, put/call rights Buy-out payment terms Valuation methodology for interests Life insurance funding provisions Dispute resolution **Confirm agreement does not conflict with estate planning documents** 5

6 Getting Out: Employee Stock Ownership Plan If the owner does not have an available heir to take over the business, an ESOP uses corporate tax-deductible money to provide liquidity for shareholders, create a market for shares, raise working capital for the business, and charitable giving by transferring the company s capital stock to the employees of the company. Company contributes stock or cash to purchase stock to trust (or ESOP borrows money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan) Company contributions to the trust are tax-deductible, within certain limits Stock is allocated to individual accounts for employees within the trust When cash is contributed to the trust, it is used to purchase stock from the original shareholders and allocated to the individual accounts of the employees 6

7 Transferring the Business: Gifts If the desire is to transfer shares to the owner s heirs rather than liquidate the interest, the owner can transfer by outright gift. Outright gifts equal to the annual exclusion (currently $14,000 to each person or $28,000 if the owner has a consenting spouse) Outright gifts greater than the annual gift tax exclusion which would reduce the Applicable Federal Estate Tax Exclusion Amount available at death (currently $5.43 million) Gifts in trust to family members which would reduce the Applicable Federal Estate Tax Exclusion Amount available at death (after application of the annual exclusion if Crummey Powers are used) Gifts of interests in a family limited partnership (FLP) or limited liability company (LLC), using applicable discounts; 7

8 Transferring the Business: Sales If the desire is to transfer shares to the owner s heirs rather than liquidate the interest, the owner can transfer by a sale to the heir on preferential terms. Intra-family installment sale using Code Section 7872 minimum interest rates, which are usually well below the prevailing market rate charged by banks (currently ranging from 0.41% to 2.65%, depending on the term of the loan) 8

9 Transferring the Business: GRATs, IDGTs & SCINs The following transfer options provide favorable estate and income tax treatment for transfers to the owner s heirs. Transfer to Grantor Retained Annuity Trust ( GRAT ) Installment sale or annual gifts to an Intentionally Defective Grantor Trust ( IDGT ) Sale using a Self Cancelling Installment Note ( SCIN ) 9

10 Transferring the Business: Liquidity The owner may consider lessening the estate tax burden on heirs by providing more liquidity as part of the estate plan so the business assets are not impaired. Post-mortem estate tax elections Code Sections 2032A, 6166, and 303 Life insurance Charitable giving techniques, e.g., outright bequests, charitable gift annuities, gifts of real estate, charitable lead trusts, and charitable remainder trusts 10

11 Handing it Over: In Summary Disposing of a closely-held business presents practical, legal, and tax challenges and every situation is unique. To maximize the likelihood of a successful outcome regarding the final disposition of the business, consider: Control and management issues Equity and fairness issues Existing legal structures, agreements, and restrictions Valuation and tax issues Leveraged estate planning techniques Post-mortem estate tax elections Life insurance Charitable giving 11

12 Thank you! Cristin C. Keane, J.D., LL.M. Florida Bar Board Certified in Tax Law Carlton Fields Jorden Burt, P.A W Boy Scout Blvd Suite 1000 Tampa, FL ckeane@cfjblaw.com

13 Your Notes