Tag Archives: business owners

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/

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 – Second in a Series

In the previous article, I cited that an “Entity Purchase,” one in which, essentially, the business buys out the deceased shareholder’s beneficiary, presumably the spouse.  While this arrangement may seem logical, it is the least efficient from a tax-perspective.  This is because the remaining shareholders do not get a “stepped-up” tax basis on the newly acquired shares and wind up paying the maximum in capital gains taxes once they sell their share of the business.  What should they do?  Can they conveniently reduce their tax burden?  Some intrepid life insurance agents have suggested that the owners purchase multiple life insurance policies:  the formula for this is (the number of business owners – 1) x the number of business owners).  So, if there are three business owners, they should purchase a total of six policies ((3 – 1) x3)).  Here’s a better way that accomplishes the following:

1.  Simplicity.  Three business owners;  three life insurance policies.

2.  Stepped-Up Tax Basis.  Your capital gains taxes are minimized.

The solution is for a trust to be both owner and beneficiary of all the policies.  This way, when one of the business owners passes away, the trust receives the proceeds and buys out the deceased shareholder’s beneficiary.  Because of the trust arrangement, the remaining shareholders receive a stepped-up tax basis, and their capital gains taxes are held to a minimum.  A word of caution:  make sure that you get an attorney who has written these kinds of  trusts before.  You’ll save yourself a great deal of trouble by doing a bit of research first!

For more information, go to:  http://www.thriftytermquote.com/

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/