Succession Planning for the Closely Held Business Owner
Many business owners
have created very
profitable
businesses. However,
most closely held
businesses fail to
survive past one
generation because
of estate taxes. If
the business remains
in the owner’s
estate, it may be
subject to very
onerous estate
taxes. Many
businesses have to be
sold for the purpose
of paying estate
taxes. The goal of
succession planning
is to set up a
structure through
Grantor Retained
Annuity Trusts
(GRATs) or make
sales to
Intentionally
Defective Grantor
Trusts (IDGTs) to
make sure the
business is not
subject to estate
tax and to insure
the business stays
within the family.
Shareholder Agreements
Shareholder
Agreements are
necessary to provide
for the orderly
transition of a
business with
multiple
shareholders. These
agreements often
restrict
transferability to
non-employees and
create a buy-out
mechanism in the
event a shareholder
dies, becomes
disabled or retires.
These agreements are
a critical part of
the estate to insure
that partners do not
end up in
litigation.
Distribution Planning for Retirement Accounts and IRAs
Many individuals
generate large
retirement assets
through
contributions and
appreciation. In
most cases, an
individual is
required to withdraw
minimum
distributions based
on IRS tables
beginning at age 70
½ . Because these
minimum
distributions are
relatively small,
significant
retirement assets
may be left at
death. With proper
planning, these
assets can be left
to children and
grandchildren who
will also be able to
withdraw minimum
distributions based
on their own life
expectancy. If a
grandchild is
selected as
beneficiary, the
income tax deferral
can be for 70 years
or more (the life
expectancy of the
grandchild) allowing
for decades of tax
deferred growth.
Trusts can be
created to be
beneficiary to keep
control with a
responsible person.
Asset Protection
Asset protection is
an important part
value of the estate
planning process. In
a very litigious
society, people need
to protect their
assets from the
claims of creditors.
Otherwise, there may
not be any assets
left in the estate
to plan for.
In theory, someone
can bring you to
court for whatever
reason. Asset
protection is the
art of creating
enough hurdles
against potential
litigants so that it
makes sense for them
to settle at cents
on the dollar,
rather than pursuing
litigation. Some of
the legal hurdles
include:
Transferring
assets to a
spouse or a
trust
Lifetime gifts
Setting up a
family limited
partnership
where a general
partner has
discretion to
limit
distributions of
partnership
income and
assets
Setting up a
domestic trust
in certain
states, where,
even though a
grantor is
potential
beneficiary of
the trust, the
trust assets are
still protected
from creditors
Using life
insurance as an
asset protection
vehicle (money
infused into
insurance and
retirement plans
are harder for
litigants to
reach)
“Indirect
prenuptials” can
be used to
protect assets
from the spouses
of children in
the event a
child divorces
Retirement Planning
An essential element
of retirement
planning involves
pensions, an area
which many small
business owners
neglect. We work
with pension
actuaries to help
you design and
implement a pension
plan that suits your
needs.
For small
businesses, pension
plans can be devised
with keeping
employee goals in
mind, while others
are designed with a
focus primarily on
the personal
interests of the
business owner. We
can analyze your
plan and have it
altered it based on
your specific
wishes.
Consider the
following example:
A 47-year old
physician, has a
medical practice
with a retirement
plan being funded
with $70,000 per
year. $28,000 was
allocated to the
doctor and the rest
allocated to his
employees. The
doctor wanted to
modify the focus of
the plan to fulfill
his personal
interests. Maurice
Kassimir &
Associates, P.C.
worked with
actuaries to design
a new defined
benefit plan which
increased annual
contributions to
$218,000. $205,000
was allocated to the
doctor (instead of
$28,000), and
$13,000 to the
employees (instead
of $42,000). In
addition, the doctor
was able to purchase
through the defined
benefit plan using
pre-tax dollars a
$7,100,000 permanent
life insurance
policy with an
annual premium of
$47,000.
