EHDH Estate Planning

What Is Family Business Succession Planning?

The importance of the family business in the U.S. can’t be overstated. Neither can the problems that occur as a direct result of a failure to plan for succession. Business succession planning is the development of a plan for determining when an owner will retire, what position in the company they will hold when they retire, who the eventual owners of the company will be and under what rules the new owners will operate, instructs a recent article, “Succession planning for family businesses” from The Times Reporter. An estate planning attorney plays a pivotal role in creating the plan, as the sale of the business will be a major factor in the family’s wealth and legacy.

• Start by determining who will buy the business. Will it be a long-standing employee, partners, or family members?
• Next, develop an advisory team of internal employees, your estate planning attorney, CPA, financial advisor and insurance agent.
• Have a financial evaluation of the business prepared by a qualified and accredited valuation professional.
• Consider taxes (income, estate and gift taxes) and income requirements to sustain the owner’s current lifestyle, if the business is being sold outright.
• Review estate planning strategies to reduce income and estate tax liabilities.
• Examine the financial impact of the sale on the family member, if a non-family member buys the business.
• Develop the structure of the sale.
• Create a timeline.
• Get started on all of the legal and financial documents.
• Meet with the family and/or the new owner on a regular basis to ensure a smooth transition.

Selling a business to the next generation or a new owner is an emotional decision, which is at the heart of most business owner’s utter failure to create a plan. The sale forces them to confront the end of their role in the business, which they likely consider their life’s work. It also requires making decisions that involve family members that may be painful to confront.

The alternative is far worse for all concerned. If there is no plan, chances are the business will not survive. Without leadership and a clear path to the future, the owner may witness the destruction of their life’s work and a squandered legacy.

Speak with your estate planning attorney and your accountant, who will have had experience helping business owners create and execute a succession plan. Talking about such a plan with family members can often create an emotional response. Working with professionals who benefit from a lack of emotional connection to the business will help the process be less about feelings and more about business.

Reference: The Times Reporter (March 7, 2021) “Succession planning for family businesses”

Estate, Business and Retirement Planning for the Farm Family

The family is at the center of most farms and agricultural businesses. Each family has its own history, values and goals. A good place to start the planning process is to take the time to reflect on the family and the farm history, says Ohio County Journal in the recent article “Whole Farm Planning.”

There are lessons to be learned from all generations, both from their successes and disappointments. The underlying values and goals for the entire family and each individual member need to be articulated. They usually remain unspoken and are evident only in how family members treat each other and make business decisions. Articulating and discussing values and goals makes the planning process far more efficient and effective.

An analysis of the current state of the farm needs to be done to determine the financial, physical and personnel status of the business. Is the farm being managed efficiently? Are there resources not being used? Is the farm profitable and are the employees contributing or creating losses? It is also wise to consider external influences, including environmental, technological, political, and governmental matters.

Five plans are needed. Once the family understands the business from the inside, it’s time to create five plans for the family: business, retirement, estate, transition and investment plans. Note that none of these five stands alone. They must work in harmony to maintain the long-term life of the farm, and one bad plan will impact the others.

Most planning in farms concerns production processes, but more is needed. A comprehensive business plan helps create an action plan for production and operation practices, as well as the financial, marketing, personnel, and risk-management. One method is to conduct a SWOT analysis: Strengths, Weaknesses, Opportunities and Threats in each of the areas mentioned in the preceding sentence. Create a realistic picture of the entire farm, where it is going and how to get there.

Retirement planning is a missing ingredient for many farm families. There needs to be a strategy in place for the owners, usually the parents, so they can retire at a reasonable point. This includes determining how much money each family member needs for retirement, and the farm’s obligation to retirees. Retirement age, housing and retirement accounts, if any, need to be considered. The goal is to have the farm run profitably by the next generation, so the parent’s retirement will not adversely impact the farm.

Transition planning looks at how the business can continue for many generations. This planning requires the family to look at its current situation, consider the future and create a plan to transfer the farm to the next generation. This includes not only transferring assets, but also transferring control. Those who are retiring in the future must hand over not just the farm, but their knowledge and experience to the next generation.

Estate planning is determining and putting down on paper how the farm assets, from land and buildings to livestock, equipment and debts owed to or by the farm, will be distributed. The complexity of an agricultural business requires the help of a skilled estate planning attorney who has experience working with farm families. The estate plan must work with the transition plan. Family members who are not involved with the farm also need to be addressed: how will they be treated fairly without putting the farm operation in jeopardy?

Investment planning for farm families usually takes the shape of land, machinery and livestock. Some off-farm investments may be wise, if the families wish to save for future education or retirement needs and achieve investment diversification. These instruments may include stocks, bonds, life insurance or retirement accounts. Farmers need to consider their personal risk tolerance, tax considerations and time horizons for their investments.

Reference: Ohio County Journal (Feb. 11, 2021) “Whole Farm Planning”

When Should Succession Plan Be Used?

Anyone with a taxable estate that includes an operating business should be looking into the efficacy of making gifts in 2020 to take advantage of a unique set of circumstances, advises the article “Why Now is the Right Time to Execute Succession Plans” from Worth.

The federal exemption from transfer taxes is at a historically high level. Individuals may transfer up to $11.58 million of assets during their lifetime without incurring federal gift, estate or generation skipping transfer tax (GST). The current maximum federal gift and estate tax rate and the current maximum federal GST tax rate is now 40 percent. As the law stands now, this amount is not scheduled to be reduced until the end of 2025, but whether that will remain is anyone’s guess.

The IRS has stated that it will not attempt a claw back of taxes if the exemption amount decreases soon, so taxpayers who put off taking action before December 31, 2020 will miss out.

Lower Value Another Incentive to Develop a Succession Plan

It is important not forget the impact of the global pandemic. Valuations in some parts of public markets continue to be high, but many private companies have lost a lot of value. The lower appraised values can be beneficial for succession planning. If a business owner is willing to transfer all or a portion of the private company to successive generations now, that lowered appraisal value means that more wealth can be shifted. There is the possibility of growth in the future, free of gift, estate, or GST tax.

How Do Interest Rates Impact Succession Plans?

Many strategies used to transfer assets between generations are based on interest rates which are near the lowest they have ever been. Every month, the IRS releases the updated Section 7520 and Applicable Federal Rates (AFR). These are the rates used for transfer techniques like GRATs and intra-family loans. In October, the 7520 rate was 40 basis points (“bps”), and the Mid-Term Annual AFR, used for loans with terms of three to nine years was 39 bps.

Succession Plans Take Time to Create

This unique combination of exemptions, low business valuations and low interest rates is likely to lead many business owners to their estate planning attorney’s offices to implement succession plans before the calendar years ends. The smart move is to contact your estate planning attorney, CPA, and financial advisor as soon as possible to discuss options, and get succession plans going. There will likely be a more-than-usual last minute rush to complete many financial and legal tasks this December, and getting started as early as possible will make it more likely that your succession plan can be completed before December 31, 2020.

Reference: Worth (Nov. 2, 2020) “Why Now is the Right Time to Execute Succession Plans”

Securing Farm or Ranch Needs to Happen Sooner and Not Later

Most American farms or ranches are family businesses, started by one generation with the hope that the business will be transferred to the next generation. However, surveys show that only 20% of farm and ranch owners are confident they have a good plan in place for the transition, reports High Plains Journal in the article “Don’t wait to secure the future of your farm or ranch.” A common reason is that owners just aren’t ready, or they don’t have the time, or the right advice. They could also be put off by the complexity of the process.

Transition planning is possible. There are solutions for every farm, ranch or business, whether the goal is to ensure that your legacy continues, minimize taxes or provide for heirs who are and who are not involved with the business.

Understand that the process can take at least a year. A good estate planning attorney who is familiar with family businesses like yours will be an important help. The process will include both estate and succession planning. Here are some basic steps to help:

Reaching consensus. You’ll need to have discussions to clarify what the senior generation wants, and what their heirs want. Discuss how management and task-focused work is currently divided and who is going to step to up take what tasks.

Developing a plan. How will the operation go forward, and how will assets be distributed? What kind of coaching will be needed to ensure that the next generation has the tools and knowledge to succeed?

Estate planning is the paper and financial part of the process that will provide ways for the operation to mitigate estate taxes and prepare for wealth and asset management.

The succession plan involves the “people” side of the business, including developing vital business management and leadership skills, passing down the values of the founding owners and providing clarity for the family throughout this process.

Implementing the plan. This will be different for every scenario, but might include:

• Splitting the operation into two entities: one that will operate ranch operations, another that will own the land.
• Stipulating the owners with two types of ownership: voting and non-voting.
• Voting ownership—deciding if it is to be retained individually or controlled by a trust.
• Should non-voting ownership be transferred to trusts to reduce estate taxes?
• Transfer strategies must be evaluated: gift, sale or stock options.

Here’s the most important concept: start now. Waiting to talk with an estate planning attorney could leave heirs in a situation where they can’t continue the family legacy. A failure to plan could mean they are forced to sell the land that’s been in the family for generations.

Reference: High Plains Journal (Aug. 14, 2020) “Don’t wait to secure the future of your farm or ranch”

Not a Billionaire? Trusts Can Still Be Beneficial

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

• Protect assets from creditors
• Allow heirs to avoid probate of assets in the trusts
• Avoid, minimize or delay estate taxes, transfer taxes or income taxes
• Control how assets are disbursed or invested
• Facilitate business succession planning and manage business assets
• Shelter assets for descendants, if a spouse remarries
• Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

Is There a Succession Plan for the Cleveland Cavaliers and Dan

Fifty-seven-year-old real estate billionaire Dan Gilbert may fully recover from a stroke and devote decades to running his businesses and enjoying the perks of owning an NBA basketball team. However, the founder and chairman of Quicken Loans also may struggle for years to recover. What will happen to his sports teams and his businesses?

Crain’s Cleveland Business’s reports in the recent article, “Dan Gilbert situation raises sports team estate planning question,” that as sports teams have grown into billion-dollar businesses, the stakes have dramatically increased over the fate of ownership.

Sometimes, it can be quite complex when an owner dies, since some of them aren’t very clear on what should happen to the team when they die. Other owners have made elaborate plans that are run aground by estate tax issues or family politics.

Gilbert is in charge of an investment group that paid $375 million for the LeBron James-led Cavaliers in 2005. That investment has paid off with an NBA championship in 2016 that likely endears him to the people of a city that had been without any pro sports championship since 1964. Gilbert has now poached the popular University of Michigan basketball coach John Beilein to coach the rebuilding Cavaliers to try for another title next year.

Gilbert hasn’t given any indication about what his succession plan is for the team is, although each of the major leagues requires owners to inform them of these plans. Placing a team in a trust is a frequent practice. This can protect an owner’s heirs from federal estate tax bills that can run into the hundreds of millions of dollars for pro sports franchises (spouses are exempt from estate taxes, but not children).

Entrusting an asset will freeze its value under federal gift tax law at the time it was placed in the trust—that’s a way an owner can decrease the eventual tax bill. However, because professional sports team values have been skyrocketing with huge TV deals and other revenue streams, the tax value of a team can be staggering, even for the wealthy.

Another strategy is for a sports team owner to buy an insurance policy. The proceeds can pay the estate taxes, so heirs don’t struggle with tax bills, which sometimes can force a team sale. This occurred when the estate tax bills from the IRS precipitated the sale of the NFL’s Miami Dolphins in 1993 and St. Louis Rams in 2008. The Lerner family had to sell 40% of its stake in credit card giant MBNA to pay its estate tax bill, when Cleveland Browns owner Al Lerner died in 2002.

Another Detroit businessman, Ralph Wilson, owned the Buffalo Bills. Upon his death at age 95 in 2014, he had arranged for the team to be sold by his estate to benefit the Ralph C. Wilson Jr. Foundation. Wilson’s decision was part of an overall estate plan that was done well.

Reference: Crain’s Cleveland Business (May 29, 2019) “Dan Gilbert situation raises sports team estate planning question”

Middle-Class People Need Estate Planning Just As Much, If Not More Than The Wealthy

When a billionaire loses half of his wealth in a divorce, they’re still wealthy. But when a middle-class person hasn’t planned for estate distribution or long-term health care, there’s more of a chance their retirement could be at risk. That’s part of what Forbes explains in “Why Estate Planners Aren’t Just for the Ultra-Rich,”

Although estate plans may be more complicated for larger estates, just about everyone can benefit from having one. Let’s examine the main reasons why:

Avoiding probate. This is a big reason why the importance of estate planning is for everyone. You don’t have to be part of the 1% to want to avoid putting your family through the stress and expense of probate. Creating a trust and strategically placing assets within its control, eliminates many headaches.

Maintaining control from the grave. Even after death, you can still impact how your assets are distributed, as well as to whom and when.

Protecting your legacy. When you consider leaving a legacy for the next generation, it may have lofty pursuits. However, those aren’t necessarily reasonable goals for everyone. Leaving a legacy can also mean making certain that heirs properly respect all the effort and sacrifice that it took to save and create a retirement fund—whatever its size.

Creating a business succession plan. Among the countless small businesses in the U.S., most will continue to remain viable after the legacy owner dies. A business owner can plan for this within an estate plan which details exactly what they want to happen, if they die unexpectedly. That could include outlining specific roles and responsibilities for surviving heirs or putting into place a buy-sell agreement with a business partner and directing the distribution the proceeds of the sale.

All estate plans need to be reviewed on a regular basis. That may be when tax season is over and you have a clear picture of your assets and liabilities, or when life’s big events occur. A birth of a child, the passing of a close relative, a divorce or an estrangement with a loved one.

Every estate planning attorney has stories of reviewing estate plans with clients and finding that they have left money to a person they no longer speak with or an ex-spouse is still their beneficiary. Another common error is giving someone an asset that the person no longer owns, like a share in a business or a piece of property.

The word “estate” does make it sound like something for people who live in mansions, but this kind of plan is for everyone. If you don’t have one, now is the time to get started.

Reference: Forbes (April 15, 2019) “Why Estate Planners Aren't Just For The Ultra-Rich”

How to Make a Succession Plan for a Family Business that Succeeds

It’s hard not to have some kind of preferential treatment, if some members of the family are working the land, says North Bay Business Journal’s article, “How to plan for a smooth transition of your family business,” while others have left the area in pursuit of a different lifestyle. Does a non-farming adult child get an equal share in a family vote or inheritance? On the other hand, why should they be penalized for wanting a different life?

A crucial step in handling family dynamics is calling a meeting with everyone to discuss what’s going on with their business. A family meeting is an opportunity to discuss decisions with family members with reduced conflict and confusion.

To have a successful business succession plan, start with a business plan for the business. Next move to both financial planning and estate planning, especially estate planning for the current owner. You should then do tax planning around all of that.

Addressing the tax exposure is a challenge faced by those transferring assets. There are some tax issues with estate planning and asset transfer, unless it’s done during life. Transferring a business, or other assets when the owner is still alive, can be beneficial in the long run. Lifetime gifts can be a way to reduce estate taxes, because making a gift today before there’s been substantial appreciation is a way to leverage your gift and estate tax exemption.

A parent who transfers assets while still alive, would have to be willing to say goodbye to the income from an asset.

However, that doesn’t necessarily mean giving up control of the business. The process of transferring control of a business can benefit from a gradual approach. If you want to transfer the business to one or more of your children, but you want them to succeed on their own, you could bring them into the business as a manager and give them a little bit of ownership.

The plan for successful succession begins by with a broader vision of what the desired outcome will be. An experienced estate planning attorney who has helped many families transition from one generation to the next, can be a major asset. They’ll be able to help you and your family create a plan that makes sense from a wealth transfer and tax planning perspective. Don’t be surprised if it takes several years to create and execute a plan.

Reference: North Bay Business Journal (April 9, 2019) “How to plan for a smooth transition of your family business”

Amazon’s Billionaire Bezos Divorce: He’s Still Very Rich

When personal wealth is measured in billions, there are no lack of advisors and strategies that can be used to protect income, investments and shares of a business from the IRS or matrimonial attorneys. News about the divorce of Amazon’s Jeff Bezos reports that he’s handing over 25% of his controlling stake in Amazon.

According to this article from WealthAdvisor, “Bezos Besieged: Was $35 Billion Divorce The Most Expensive Wake-Up Call Ever?” Bezos never moved this company stock into a trust. The divorce settlement of 25% of Amazon with his ex-wife MacKenzie is really a bargain, despite the fact that it means whittling at least $35 billion off his net worth.

Bezos still has 59 million shares, a 12% stake in the company, as well as voting rights on all her stock, for as long as she owns it, which still gives him control.

Bezos’ mistress also recently just filed for divorce, so if he wants to protect his remaining $108 billion in Amazon stock and eliminate the risk of marital history repeating, he should make some plans. A prenuptial arrangement is definitely needed for any future marriage. And yet, he won’t be struggling, even if there is a second marriage and it too ends without a prenup.

Bezos could live an extravagant life, running through $1 billion a year and still have plenty of money to live on.

For now, the company continues to depend upon his vision. Amazon began as an out-of-the-box idea. He’s grown the company into a world-changing force, and the Amazon most of us deal with, is just a small part of it. There’s no doubt he’ll continue.

In addition to consideration of wealth protection and prenups, Bezos should start thinking about his legacy and a succession plan. At age 55, he’s far from done being a visionary, but it would be wise for him to make a plan to gradually remove himself from the day-to-day Amazon operations. He’ll want to develop the next generation of visionaries, who can continue his course.

Reference: Wealth Advisor (April 8, 2019) “Bezos Besieged: Was $35 Billion Divorce The Most Expensive Wake-Up Call Ever?”

What Will Happen to Rapper Nipsey Hussle’s Children?

When Rapper Nipsey Hussle was killed in front of his store in Los Angeles, he left behind two minor children and a girlfriend. If he did not have an estate plan, he joins artists like Aretha Franklin and Prince who also died with no estate plans. He also created a problem for his children, because minors are not permitted to own more than a certain amount of assets, according to Rolling Out’s article, “RIP Nipsey Hussle: 5 reasons you need an estate plan.”

This means that a guardian or trustee must be appointed to manage the funds for them, until they reach the age of majority. If the deceased doesn’t have a will that instructs who that guardian shall be, they will be chosen by the court. In this case, Nipsey’s longtime girlfriend Lauren London would get nothing from Hussle’s estate (even though that may not have been his intention), because it looks like she wasn’t his spouse or an heir. Consider these important reasons for an estate plan:

Property transfer wishes. This is the primary objective of estate planning. Your estate consists of all your property (real, personal, and intellectual) minus your debts. Your estate plan will determine who gets what and when. Create clear goals, as to who should inherit your property and alternative beneficiaries, in case someone predeceases you.

Transfer costs and taxes. Another goal of estate planning is maximizing any available tax benefits. You can limit estate taxes by creating trusts, making charitable donations and by establishing a family limited partnership for a business.

More net assets to heirs. An estate plan will help avoid the expense and delays of probate.

Liquidity at death. Funds need to be available to satisfy the immediate needs of the family. This can be accomplished with life insurance policies, IRAs, stocks and bonds. If all of your property is being transferred by will or intestate succession, no one gets anything, until the estate is probated.

Personal wishes surrounding death. Write down all of your preferences concerning burial, cremation, and organ donation to help your family.

Since this article was first published, Rolling Out added an update that said that Nipsey Hussle and Lauren London may have been secretly married. If that’s the case, she would inherit part of the estate. Otherwise, his family will be busy trying to untangle his estate, seeking guardianship of his children and many other tasks, all during a difficult time.

Reference: Rolling Out (April 1, 2019) “RIP Nipsey Hussle: 5 reasons you need an estate plan”