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Cutting the Estate Tax Burden for Private Company Owners

Owners of private companies often hope that the business they have built will benefit their families in the long term. No matter whether you plan to benefit your loved ones by selling the business upon your death and providing them with the proceeds, or passing the business itself on, there are certain steps you can take now that will minimize the tax burden when your business eventually changes hands. An article in the Financial Post details some of these steps.

One of these steps is to provide for charitable donations in your will. Such donations are treated as gifts made in your last year of life, and therefore provide a credit on your final tax return. In the year of and immediately preceding your death, the charitable donation limit is 100%, rather than 75% in all other years.

There are also a multitude of trust arrangements you can set up in your will  (testamentary trusts) as a tax-effective way to transfer business assets to your families. Testamentary trusts pay income tax at graduated rates as though it were an individual. Therefore, by creating a “new taxpayer” through the trust, you may provide your family with an annual tax savings. Moreover, your spouse will not have to pay capital gains tax on assets transferred from your will to a spousal trust.

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Succession Plans for Franchises

Although most people do not enter into a franchise agreement with the goal of creating a family business, children are increasingly choosing to succeed their parents in owning the family franchise. However, the International Franchise Association (“IFA”) reports that only 30 percent of family-owned franchises survive into a second generation. A recent article in Entrepreneur discusses how franchise owners can best prepare for a successful succession.

Succession plans for franchises are inherently difficult because the franchisor generally yields veto power over any proposed succession, and is the sole decider of whether a person is qualified to succeed his or her parents as a franchise owner. According to attorney and co-author of the IFA handbook William Slater Vincent, Franchise Succession Planning and Transfers, “I’ve worked with franchises from over 100 systems, and every single franchise agreement I’ve seen clearly states that if the franchise owner dies, the franchisor has to approve the successor.” Such provisions mainly serve as a protective mechanism for the franchisor. Said Vincent, “I don’t know how many times a husband dies and his wife takes over the business even though she was never involved before. Instead of being a viable business, it becomes an asset sale. Franchisors don’t want that.”

Each franchise has a different protocol for succession planning. These protocols range from not paying attention, to allowing local reps to sign off on proposed successions, to requiring that successors undergo rigorous training akin to that of a new a franchisee. The key to creating a successful succession plan, therefore, is speaking to your franchisor about any succession requirements, and creating a plan that qualifies your chosen successor in the eyes of the franchisor.

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Exit-Planning for Business Co-Owners

Many times, the last thing entrepreneurs consider in the process of starting a new business venture is how they will handle the departure, on good terms or otherwise, of a co-owner. As a recent article explains, it is never too soon to begin crafting an exit plan.

By its very nature, co-ownership of a business by its founding individuals cannot last forever. Consequently, the article suggests that co-owners need to address and have an action plan for three important questions:

  1. When will a co-owner have an option or obligation to sell or otherwise divest himself of his ownership interest?
  2. In situations where an ownership interest will be sold, how will the co-owners determine an appropriate purchase price?
  3. After an appropriate purchase price is determined in sale situations, where will the money to pay it come from?

“Trigger events” are events that lead to the option or obligation to sell an ownership interest in a business. Some of the more common trigger events occur when a co-owner dies or becomes disabled, or terminates his employment with the business. Although planning for these decisions may involve difficult or uncomfortable discussions, wise co-owners will maintain and update a well-documented exit plan.

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What do you need to address for your family?

Your goal may be making sure your children & spouse are financially secure and to protect your assets from those who may ‘attack’ them. Perhaps you want to ensure your property and business is secure in the event of the following: death, divorce, a partner developing a debilitating disability and/or creditor’s attacks. Or it may be as simple as naming a guardian for your minor children. Most probably, your goals and needs are a combination of the above, plus other circumstances unique to you.

There’s no such thing as a ‘one-size-fits-all’ estate plan or a ‘cookie-cutter’ simple will. Different goals and unique circumstances requirepersonal attention and customized plans. Here are examples of client estate planning needs we’ve addressed in the recent past:

• An IT Professional and his business partner needed a comprehensive Buy-Sell agreement which ensured that in the event of either of their untimely deaths, the business can continue to run, but the deceased partner’s family would be paid a fair market value for his share of the business. As you can see both the family and the business needs are addressed.

• A married couple with substantial real estate investmentswanted to ensure that their personal home and assets wouldn’t be lost to a tenant, a lender or other litigant who sues them as a result of liabilities arising from their investments. We were able to implement an Asset Protection Plan which shields their family assets from liabilities than can arise from their investments. Most importantly, they also named a Guardian for their minor children in the event neither of them is around.

• One of our clients is a Physician who is married. Her husband is anon citizen. Her concern was saving money in Estate Taxes and what would occur if she died and her husband survived her, still not an American citizen. We implemented a plan, consisting of Wills and Trusts for each, that will save hundreds of thousands of dollars. Also addressed was the potential negative tax impact facing her husband upon her death as a result of his Resident Alien status. They also chose to create a Pet Trust for their dog.

Your customized plan should address your individual goals and needs. We can work together to put into effect a plan for your asset and income protection that will allow you to keep intact the Estate that you have spent a lifetime creating.