Business Continuation for More Than Two Owners – First in a Series

One of the most difficult and perplexing issues facing business owners is how to transfer a business to successive owners. This gets especially more complicated when the transfer involves more than two business owners. Assuming that the owners (called shareholders) have a competently written Buy / Sell Agreement, the question becomes how to structure the funding mechanism.   That is, what entity owns the life insurance policies that cover each shareholder and how do you make this the most tax-efficient for everyone involved?

The easiest – and least tax-efficient – is for the Company to be the owner and beneficiary for all the life insurance policies. This way, when an insured dies, the life insurance proceeds get paid directly to the Company, which then retires the deceased’s shares and pays the heirs the fair market value of those shares, which is presumably the amount of the death benefit of the life insurance paid. By extension, the remaining owners’ shares appreciate by the value of the deceased shares. The trouble with this arrangement is that the tax basis for these shares remains the same. This means that, when the remaining owners sell their shares in the business, they pay capital gains on everything over-and-above their original tax basis – including on the appreciation from the newly acquired shares.

Can they do better? Most definitely yes! To find out how, go to: http://www.thriftytermquote.com/

Estate Planning – Equitable Distribution

How to distribute business assets when only two of the three children work in the family business?  Here’s how we worked this one out…….

Situation:  A 62 yr-old owner of a medical supply company valued at $5 million is married with three children – two of whom work in the business.

Issue:  Upon death, the business will transfer to the two children.  However, the client wants to compensate fairly the child who does not work in the business.

Solution:  Since the first two children will inherit a $5 million business, we recommended that the third child become owner and beneficiary of a $2.5 million life insurance policy (with death benefit guarantee, of course).

Benefits:  The insurance is kept out of the client’s estate and will pass to the beneficiary tax-free.  In addition, the child outside of the business is satisfied and the other two children own the business with no contingencies or outside interference.

For more information. go to: http://www.thriftytermquote.com/contact-us/

Common Estate Planning Mistakes – Third in a Series

As you have seen from previous articles, Estate Planning is fraught with pitfalls.  Many times, people will attempt to build their own estate plan but, unfortunately, don’t know what questions to ask.  My goal is to help you understand the issues that face even modest estates.

A.  Improper Disposition of Assets.  This occurs whenever the wrong asset goes to the wrong person in the wrong manner or in the wrong time-frame.  For example, leaving an entire, complex estate to a spouse who is unprepared or unwilling to handle it.  Leaving a sizable estate to a teenage is another good example.  The solution is to consider a trust or custodial arrangement and to provide in the Will for young or legally incompetent people.  Also, an often overlooked consideration is a “common-disaster” provision so that assets can avoid needless second probates and double inheritance taxes.

B.  Ensuring that your business is a Going Concern.  What happens to your business if a key revenue-generating employee dies or is disabled unexpectedly?  Do you have a “shock absorber” in place?  Key employee life and disability insurance coupled with good business overhead coverage will certainly help.

C.  Buy-Sell Agreements are essential if your business is to survive the death or disability of one of the owners.  Unfortunately, many business: have no such agreement; or the agreement isn’t in writing; or the price doesn’t reflect the current value of the business; or the agreement isn’t properly funded.  The bottom line is that the heirs are not guaranteed the fair market value to which they are entitled.  If you think you’ll skate by giving a grieving widow a value for her share that “the accountant came up with,” think again.  I know of many cases in which that kind of “solution” wound up being settled by lawyers.

For more information, please contact us at:  http://www.thriftytermquote.com/contact-us/

Business Continuation for More Than Two Owners – First in a Series

One of the most perplexing issues facing business owners is how to transfer a business to successive owners. This gets especially more complicated when the transfer involves more than two business owners. Assuming that the owners (called shareholders) have a competently written Buy / Sell Agreement, the question becomes how to structure the funding mechanism. That is, what entity owns the life insurance policies that cover each shareholder and how do you make this the most tax-efficient for everyone involved?
The easiest – and least tax-efficient – is for the Company to be the owner and beneficiary for all the life insurance policies. This way, when an insured dies, the life insurance proceeds get paid directly to the Company, which then retires the deceased’s shares and pays the heirs the fair market value of those shares, which is presumably the amount of the death benefit of the life insurance paid. By extension, the remaining owners’ shares appreciate by the value of the deceased shares. The trouble with this arrangement is that the tax basis for these shares remains the same. This means that, when the remaining owners sell their shares in the business, they pay capital gains on everything over-and-above their original tax basis – including on the appreciation from the newly acquired shares.

Can they do better? Most definitely yes! For more info, go to: http://www.thriftytermquote.com/