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Business Estate Planning
How to Preserve Your Life’s WorkBy: Sam BordcoshThe produce industry can be a crazy and challenging business. As I meet with fellow FIBR members and business owners, I’m constantly reminded of the dynamic nature of this market. There are so many uncontrollable forces owners today have to face; and difficult split decisions that have to be executed. I recently met with a LA produce wholesaler. He has spent his lifetime building his business. He has grown his business significantly through 40 years of blood, sweat, and tears. It seemed like he had it all down: he knew the industry and the market like a twin brother, he understood the value of building good moral, especially with his employees, he perfected the art of doing right by people, and he incentives and motivated his employees and family members to create a loyal, energetic atmosphere within his walls. A true business renaissance man. This member had his business down cold; or he thought. Unfortunately, I discovered that he was so consumed in the daily operations he never had the time to think about his legacy. Preserving his estate and his business. Understanding the succession issues he will have to face for his family and business interests……and the crippling ramifications of not being prepared. Fortunately it wasn’t too late. We were able to help this member, and secure him with the peace of mind that he needed to take his business to a higher level. Now you need to take a few moments to make sure your hard work will survive after your death or the death of one of your partners. As the owner of a closely held business, much of your wealth is probably tied up in the business. While returning earned income back into the business helps to finance growth, it can cause severe liquidity problems for your estate when you die. After paying probate and estate taxes, your estate and surviving family members may encounter liabilities that become payable soon after your death. They may also face the potential of decreased business earnings due to your absence. There are ways to overcome these liquidity problems. Creating a business estate planning strategy may help reduce estate taxes and make the best use of the cash available. The most common business estate planning strategies are buy-sell agreements, Section 303 stock redemptions, and Section 6166 estate tax deferrals. Business-owned life insurance can be used to fund each of these planning strategies. Buy-Sell Agreements - Buy-sell agreements can establish the value of your business for estate tax purposes and improve your estate’s liquidity by assuring a ready market for your business upon your death. These agreements also protect business partners from sharing ownership with a deceased stockholder’s family. There are two main types of buy-sell agreements: cross-purchase and stock redemption. In an insurance funded cross-purchase arrangement, each business owner buys an insurance policy on the other, naming themselves as beneficiary. At the death of one of the owners, the surviving owner receives tax-free insurance proceeds to use in purchasing the deceased owner’s stock from his or her estate. In an insurance-funded stock-redemption arrangement, the corporation purchases the stock of a deceased shareholder. The business is the owner and beneficiary of a life insurance policy on each shareholder. The life insurance death benefit is income-tax-free to the business if the business has met the requirements of Internal Revenue Code 101(j) at the time of purchase. These requirements include providing the insured with advance written notice, obtaining the insured’s prior written consent to be insured, and meeting the insured’s income requirements. A partnership developing a business continuation strategy may use a similar arrangement called an “entity purchase.” A buy-sell agreement that is funded with life insurance has these benefits: For Your Family
For Your Business
It also has these special considerations:
Section 303 Redemptions Section 303 of the Internal Revenue Code gives your estate a one-time opportunity to remove cash or other property from your business, at little or no tax cost, through a partial redemption of your stock. This can provide the liquidity your survivors need to pay funeral costs, estate and administrative expenses, and state and federal death taxes. To be eligible for a Section 303 Redemption, the stock value must exceed 35 percent of your estate. The maximum amount that can be paid under such a strategy equals the total amount of the federal estate tax, state death taxes, and funeral and administrative expenses. Corporate-owned life insurance can be used to fund the redemption. Under this arrangement your business purchases an insurance policy on your life and at your death uses the tax-free proceeds to buy enough stock from your estate to cover death expenses and taxes. Section 6166 An estate tax burden can force the liquidation of a closely held business. Internal Revenue Code Section 6166 was designed to prevent this liquidation. If the business interest constitutes more than 35 percent of your adjusted gross estate, the executor may elect to pay the estate tax attributable to the value of the business in 10 annual installments, beginning no later than five years after the date of the your death. There are a number of requirements you must meet to be eligible for the Section 6166 extension. If your estate qualifies, life insurance offers an economical way to pay these installments. Preparation No matter what technique you choose for your company, determining the value of the business is a key step in the estate planning process. Why? Firstly, in the case of a buy-sell agreement, you need to know the value of the business to determine the price and fund the agreement. Secondly, because the business is part of your estate, the valuation is needed to estimate the estate taxes. This helps you calculate the cash or liquidity needed to administer the estate. Finally, the value of the business must be reported on the estate tax return when the owner dies. Samer Bordcosh is a financial advisor with Tax & Financial Group, and has been actively involved in FIBR; in advocating the best interests of the members. He has worked closely with the members in helping them become good stewards of the wealth they create, as well as helping them cure difficult business and estate issues. For more information please contact Sam 949 463 0202 or via email at samer.bordcosh@tfgroup.com. Tax Considerations This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific fact pattern. Securian Financial Group, Inc. |