CA Estate Planning

Business Owners – Exiting Gracefully

The wealth of many boomers is tied up in businesses they own. And that can be a problem when it comes time to retire.

If you’re a small business owner, then you probably speak of your business and your life in the same breath. There’s nothing wrong with that. In fact, you are in good company.

All told, your business is one of the biggest challenges and accomplishments in your life. That said, it’s rare that the business is the only fulfilling thing in your life – there’s family, for one. In addition, do you really want to continue working in and on your business until the day you die, with no retirement or with old-age eventually getting in the way?

With your life and your business so intertwined, it makes it all the more necessary to plan properly.

The Wall Street Journal took up this matter in a recent article titled Preparing to Leave. I recommend this article to your reading list because it both warns of mistakes and offers solutions.

To whet your thirst, here are the “mistakes” identified:

1. Creating a business that’s too dependent on the owner.
2. Ignoring the tax benefits of planning ahead.
3. Incorrectly valuing the business.
4. Rushing to accept a rich number.
5. Hiring your brother in law to do the deal.
6. Underestimating the emotional impact of selling a business.

Like one of the old movie matinees, I am going to leave your pondering the solutions to these “cliffhangers.”

In the end, only you know when to hold’em and ergo when to fold’em when it comes to the continuation of your business. However, don’t delay. You, your loved ones and others dependent on the business will be glad you didn’t.

Reference: The Wall Street Journal (April 29, 2012) “Preparing to Leave”

 

 

Archie’s Successors … Arch-Enemies?

Just because two business partners get along well doesn’t mean the next generation will do so as well. When succession planning is done in advance, partners can agree on how potential disputes among the generation of owners can be resolved without resort messy, protracted battles among the successors.

Are you a Baby Boomer, or the child of one? If yes, then perhaps you recall the Archie Comics. Unfortunately, that halcyon world of yesteryear has given way to litigation and lawyers. Archie’s Comics has been in a state of war since the passing of the founders and the dysfunctional antics of their successors. There is at least one more lesson to learn from Archie and the gang: proper succession planning.

The story of the succession and rapid rise in hostilities can be followed in an article in onwallstreet.com titled Archie Comics Power Struggle Provides Valuable Succession Planning Lessons.

In the end, the Archie Comics tale is too commonly repeated. According to the article, one of the successors actually is accused of slashing the other’s tires; the accuser apparently is under a restraining order keeping them from the company – a restraining order which they have allegedly violated. In short, ugly stuff.

Too often ugly feuds can break out, even in once idyllic companies. The Archie Comic Publications has been around since 1941, after all, and it was only in 2007/2008 that the newest generation came on board.

When thinking about your company, it is vital to consider the future beyond your ownership. Who will be the successors? Will they be compatible partners to carry the business forward?

These and other fundamental issues are better resolved now, rather than later.

Reference: onwallstreet (April 18, 2012) “Archie Comics Power Struggle Provides Valuable Succession Planning Lessons”

 

 

 

MISTAKE THAT CAN KILL YOUR FAMILY BUSINESS

Running a family business is the most natural thing in the world--and the most unnatural. Handle it well, and it can make you rich, capitalize on bonds no ordinary colleagues could share, and keep your family employed for generations. Handle it badly, and it can instead keep lawyers employed for generations.

If you have a family business, then a recent article in Inc. magazine is a must read to avoid unaffordable mistakes. In short, these mistakes can kill your family business.

The Inc. article is titled the “4 Worst Legal Mistakes a Family Business Can Make.” While I commend the entire article to your reading, here is some of the wisdom offered by the author:

1. Do not mix your family finances with those of the business.
2. Do not muddle along without employment agreements.
3. Do not forget to get (and remain) street legal with appropriate licenses and filings.
4. Do not fail to have a succession plan.

Remember, large or small, your business is just that – a “business.”

If you treat the company accounts like your personal checkbook, hire and fire employees on a handshake (if that), ignore “legal formalities” attending the creation and operation of the business and take the “get-around-to-it” approach to the succession of the business, then do not be surprised when the business crashes and burns.

Teaching point: Take time right now to engage competent legal, accounting and financial counsel to help you stay out of trouble … before it is too late.

Reference: Inc. (April 9, 2012) “4 Worst Legal Mistakes a Family Business Can Make”

 

HOW TO MAKE YOUR FAMILY BUSINESS SURVIVE FOR GENERATIONS

Despite the particular challenges of running a family business, the successful ones recognize that their longevity depends on keeping customers, employees and shareholders happy. “We don’t like the idea of family business,” Andrew Cornell said. “We like the idea of business family.”

Getting the business started is one thing. While there are thousands of resources available to help a small business get off the ground, staying in the air is the real challenge.

Certainly, this challenge is uniquely complicated within the context of a family business.

Planning for the family business is as much art as it is science. Even though the law (science) is oftentimes fixed and immovable, the family dynamics (art) vary from one to the other. A recent article in The New York Times titled Family Businesses Learn to Adapt to Keep Thriving is not only spot on, but timely.

According to the Family Business Institute, only about 30% of all family businesses survive beyond the founding generation. Ouch, but it gets worse. Thereafter, the success rate drops to 12% after the transfer to the third generation.

The New York Times article identifies key traits common to a successful family business succession. One key to remember: If the business is a family business, then it is essential to treat the family as “family” and the business as “business.” In other words, avoid the temptation to “gift” positions in the business to family members, unless they truly are productive and motivated workers within the business itself.

In the end, what is best for you, your family and your family business will depend on many factors. Plan accordingly and enlist qualified legal counsel early and often.

Reference: The New York Times (April 4, 2012) “Family Businesses Learn to Adapt to Keep Thriving” 

 

Small-business owners beware: Roth IRAs and S Corps Do Not Mix!

It may be obvious but the powers of an S Corp cannot be combined with the powers of a Roth IRA. 

As many small business owners already know, S Corporations can be supremely advantageous, if you’re in the position to use one, because they can avoid corporate income tax.

The Roth IRA meanwhile avoids tax on future earnings by paying taxes on contributions upfront, rather than upon eventual distributions. Together that would have made for some serious savings for small business owners who also are thinking ahead and planning for their eventual estate transfers.

But you cannot have your cake and eat it too.  An S Corp election is only valid if all shareholders of the S Corp are valid, and a Roth IRA is apparently not a valid one. This became clear in the recent case of  Taproot Administrative Services, Inc., Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee.

Peter Reilly of Forbes recently highlighted the case in an article titled Hog Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock. I recommend reading the full article, as there are more moving parts and other alternatives to consider.  Too few small business owners consult their estate planner and financial consultant about the eventual transfer of their businesses as part of their overall estate planning. 

Reference: Forbes (March  28, 2012) “Hog Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock”

 

The family farm is a business and business succession planning is critical, sooner rather than later.

Perhaps more than any other kind of industry or property, planning for the succession of the family farm poses a significant challenge to the estate planner.

Some of these challenges are described in a recent article in Agri-View titled Estate planning lays framework for smooth transition.

When the farm is a family farm it is also the family business, and your estate is really about planning for the succession of the business and the farm. This can be a delicate process, but it is better to start the process sooner rather than later.

For one thing, don’t overlook the fact that farmland values can trigger estate taxes (real estate bubbles aside, land is the only thing that consistently grows in value – there isn’t likely to be any more of it made – and farms are all about land).

Accordingly, some rather sophisticated estate planning (and liquidity planning) may be in order, or the family farm could be lost to the IRS.  Estate taxes aside, there are many other considerations to secure the future of the “family” element of the family farm.

For example, who will inherit the farm, let alone continue to operate it? What if your children live in the suburbs and work every day downtown? Who will actually do the “farming”? Perhaps renting or sharecropping might be more practical. Regardless, these are the kinds of practical real-world matters that ought to be decided within a legal framework to ensure succession success.

So, if you are a farm-owner, and particularly the owner of a family farm, then there is much work to be done. While I recommend reading the original article, be sure to engage competent legal counsel, as well as any farm extension agent assistance that may be available.

Reference: Agri-View (March 29, 2012) “Estate planning lays framework for smooth transition”

 

Is 2012 the year to transfer your business for greater tax benefits?

“I’ve heard recently about the federal gift and estate tax window of opportunity for asset transfer, and was wondering if that impacts succession planning. Will there be greater tax benefits for me to leave the business in 2012, rather than 2013?”

Success in business is often dependent on good timing. Business owners time the market, time their sales, time their marketing, time their expansion, and just about everything else. Logically, then, succession planning for your business requires careful timing.

A recent article in Businessweek, titled Family Businesses Should Plan Now for Rising Gift Tax, took up the matter of succession timing. In fact, the timing component of succession planning may be more important now than in recent times, especially given the state of gift and estate laws. The current exemptions and rates were the fruit of the “great compromise” between the White House and Congress at the end of 2010. The compromise created a lifetime gift tax of $5.12 million (adjusted for inflation) for 2012, but only guaranteed that amount until the end of 2012.

As a result, if you want to transfer large assets – like a business – then 2012 may be the year. The current $5.12 million will default to $1 million at year’s end, unless the White House and Congress agree to retain the current exemption.

So 2012 may be the year – perhaps the last year – to transfer large assets with such a generous tax exemption. Depending on the value of your business, 2012 may be the year to make your move. This is especially true if your business is valued at more than $1 million and would be at risk were the laws were to sunset.

Of course, as a general rule of thumb, it is oftentimes easier (and more efficient) to transfer a business incrementally since, if nothing else, it can be monitored and protected at each stage.

In the end, be sure to engage competent counsel before taking action. There are some very complex issues that need to be considered, to include valuing the business itself, structuring the transfer and a very open tax issue regarding a potential “clawback” in the future.

This is not a D.I.Y project.

Reference: Bloomberg Businessweek (March 19, 2012) “Family Businesses Should Plan Now for Rising Gift Tax”

 

Discuss your estate plan with your heirs; you may be surprised by their opinions. Small changes now may avoid large fights after you've gone

The death of a parent often shifts the family dynamic, making issues arise that appear to be based on current events but in fact are perceived as slights that occurred years ago and are now playing out as the parents’ estate is doled out.

Families are complex. While people are complex in general, families are all the more. Why? Families are built on shared histories, both good and bad.

For better or worse, a family’s history sticks with the members of the family, informing their every decision or reaction. This is oftentimes strikingly apparent when it comes to creating one’s estate plans. Remember: The estate planning decisions you make today may affect your loved ones, perhaps for generations.

This issue was the focus of a recent article from Private Wealth titled Siblings Scorned.

As the article notes, it takes a careful hand to divide your estate amongst your family members. Sometimes, even mathematically, equal shares aren’t even in the eyes of certain family members. What are the possible tensions in the family? The reasons are as varied as the makeup of each family itself. For example, did one child get a college degree, while another was denied the opportunity because the family fell on hard times? Did one child seem more favored by the parents, either earlier or later in life?

Interestingly, the most important considerations when planning your estate are rarely money-focused. Over the years, studies have shown that communication between generations and among family members can reduce the risk of family fallouts over estate planning decisions. The “details” communicated, however, will vary from family to family.

I would recommend reading the article from Private Wealth for ideas to mull over and for some real-life stories. 

Reference: Private Wealth (March 2012) “Siblings Scorned”

 

Will your beneficiaries appreciate your art collection as much as the IRS appraises it for estate tax?

How do you dispose of your valuable art collection?  Does it go to a museum where many may appreciate it?  Will your heirs appreciate it or just send it to auction?  Here are some options.

Collecting artworks has been your passion for many years; you've built a fine collection.  However much you may appreciate early Renaissance Madonnas, your children may be more into Jackson Pollock or Joan Mitchell. Or you may have discovered Lucien Freud before he came popular and your collection has greatly appreciated in value.  Capital gains, estate and gift taxes are on your mind.  

So, how do collectors and their estate planning attorneys make proper plans for the transfer of your treasures?  There are many different options, but first of all it may be a good idea to determine the market value of the collection for taxation purposes:  This is valuation used by the IRS.

The next challenge is determining who will receive your collection.  Recently, estate planning issues regarding art have received media attention (to include the strange case of Ileana Sonnabend) as highlighted in a recent article in the Wall Street Journal appropriately titled The Art of Passing Along Art.

As the article notes, the major problem with making an estate plan to transfer art is the nature of “art” itself.  Ultimately, you need to ask yourself why you are giving the art collection in the first place. Are you giving to an art-lover or in lieu of liquid assets? Are you actually giving to the beneficiaries or are you simply trying to find safe homes for the pieces?  Or, do you bequeath it to a museum and offset the charitable deduction against your estate taxes, and probably avoid capital gains tax if you sold the pieces during your life.

Whatever your wishes, there are estate planning solutions. However, you need to prioritize your own goals and wishes for your loved ones, as well as for your art treasures.

Reference: The Wall Street Journal (March 2, 2012) “The Art of Passing Along Art”

 

ESTATE PLANNING: WHY YOU SHOUDN’T AVOID IT

It certainly is understandable that no one enjoys a conversation about death – especially their own! And, with the estate tax exemption now set at $5 million for an individual and $10 million for a couple, many people may believe they have no reason to consult an attorney about their estate planning. But avoiding the topic of estate planning can mean unnecessary expense, confusion and conflict.

SmartBusiness last week highlighted the fundamentals of a “well-thought-out estate plan,” with topics that everyone should consider – whether prince or pauper.

• Why do you need an estate plan? A comprehensive estate plan ensures that when you die your estate is distributed according to your wishes, it protects you in the event of your own disability, and allows you to plan for minor children, pets, and charitable causes.
• What are the basics everyone should have? SmartBusiness (should be hyperlink as above) recommends at a minimum a power of attorney for healthcare and a living will.  In California where I practice law these documents are combined in an Advance Health Care Directive. This Directive is critical should you become ill and unable to make your health care wishes known.   Your appointed health care agent can make sure your wishes are followed.  Also strongly recommended is a Power of Attorney for Finances and Personal Affairs.  This allows whoever you appoint to pay the mortgage, utilities and take care of your cat if you are unable to do so for yourself.  In my experience, people in hospital without such a Power, are often more worried about such matters than their illness! 
• What about a will? Absolutely, you should have one, otherwise the State where you live will distribute your estate according to its probate rules, which may not reflect your wishes.  You certainly can write your own will and there are many online sites to help you do so! However, as in most things of life, you do get what you pay for. Improperly drafted or last-minute, hand-written wills are frequently contested and invalidated in court. If you don’t know what you’re doing, the outcome could be much different than you expect.
• What about trusts? Many people choose to create trusts to help their heirs avoid the time, expense and lack of privacy in probate proceedings.  A trust can help reduce estate taxes if applicable to you,  Trusts also can help shield assets from spendthrift children, divorce, children of a second spouses, and other unforeseen circumstances, such as lawsuits against your heirs.
• What mistakes to people tend to make in estate planning? The writer points out two common mistakes: failure to plan for their personal effects which can lead to more family disputes than the distribution of money, and failure to review and update estate plans over time.

You can learn more about comprehensive estate planning in the Grain Law FAQ's section of our site.