family business Archives - Lonich Patton Ehrlich Policastri

IRS Withdraws Its Support of The Proposed Change to The Estate Tax Valuation Rules

December 5, 2017/in Estate Planning /by Michael Lonich

The US Treasury originally enacted IRC Section 2704 in 1990 to prevent people from taking advantage of the tax system. Specifically, IRC Section 2704(b) states that in valuing property for estate and gift tax purposes, some restrictions on the ability of an entity to liquidate would be disregarded. Currently, the regulation permits certain discounts for lack of control (minority interests) and lack of marketability that are commonly applied to lower the value of transferred interests for gift, estate, and generation-skipping tax purposes.

On August 3, 2016, The Treasury published proposed regulations under IRC Section 2704 that would have disallowed valuation discounts for interest in family controlled businesses that currently apply to gift and estate tax planning. By eliminating the valuation discounts, the proposed regulation would negatively impact succession planning for many small family owned businesses.

On October 4, 2017, the Treasury announced its withdrawal of the proposed regulations, explaining that they took an “unworkable” approach to the problem of artificial valuation discounts. In a press statement, the Treasury stated that the IRC Section 2704 proposed regulations: “would have hurt family-owned and operated businesses by limiting valuation discounts. The regulations would have made it difficult and costly for a family to transfer their businesses to the next generation.” Certainly, if passed, the proposed regulations would have disallowed discounts for lack of control and marketability commonly used by families in wealth transfer planning.

While the Treasury withdrew its proposed valuation regulations, it has released its annual inflation-indexed amounts for 2018:

1. The annual gift tax exclusion amount (i.e., the amount that can be given annually gift-tax-free to an unlimited number of donees) will increase to $15,000 per donee (or $30,000 for a married couple that elects to split gifts for the year), up from $14,000 in 2017.

2. The annual gift tax exclusion amount for gifts to a spouse who is not a United States citizen will increase to $152,000, up from $149,000.

3. The gift, estate, and GST tax exemption amount (i.e., the amount of taxable transfers that can be given transfer-tax-free in the aggregate during lifetime or at death) will increase to $5.6 million per person (or $11.2 million for a married couple), up from $5.49 million.

4. Recipients of gifts from foreign persons who are corporations or partnerships must report such gifts if the aggregate value of the gifts received in 2018 exceeds $16,111. The threshold for reporting gifts from a foreign person who is an individual will remain at $100,000.

Consulting with an attorney to learn about how valuation and taxation can impact your testamentary wishes is always wise. If you have any questions about your estate planning needs, please contact the experienced attorneys at Lonich Patton Erlich Policastri—we offer free half-hour consultations.

Lastly, please remember that each individual situation is unique, and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Transferring The Family Business, But To Which Child?

July 27, 2015/in Business Law, Estate Planning /by Michael Lonich

After years spend building up a successful family business, many want to pass on their success to their next generation of family members. Unfortunately, conflicts in family businesses are likely to occur when the owner and other family members begin to consider and examine the transfer of the ownership and control of the business. One of the largest conflicts to result often rises in situations where there are two or more children in line to take charge and sibling rivalry erupts. However, in planning the succession of a business, the transition may go smoother with the creation of a trust outlining the steps to be taken in the succession.

The advantage of a business trust is that a plan would have been put in place in the case of an unexpected death. However, there is still a problem with choosing which child to take charge of the family business. One of the greatest challenges in choosing which child to take over is their lack of experience, though this issue can be addressed with the following tips.

First Option: Trial Run
- You can give each child about six months or so to be in charge.
- Objectively list the qualities that you are looking for before the trial begins.
- Also, make sure to let the other employees know that the child is in charge.

Second Option: Test and Interview the Candidates
- Put the siblings through a series of written tests.
- Also, interview each candidate in order to determine who would be the best choice for taking over the business

Third Option: Leave It Up to the Children
- If there are several children, a good option may be to allow them to set up a board and let them choose who they believe would be the best successor.
- This can even include outside advisors.

Fourth Option: Have a Trustee in Place
- Put a Trust in place with a trustee running the business until he or she believes the children are ready to take over

The options above are just a few possibilities that a family business owner can try. Nevertheless, they may be able to help family business owners who are troubled by the fear that a child cannot develop the leadership qualities necessary to run the family business. But after getting through this first hurdle and putting these details in a trust, the owner will no longer have to worry about succession of the family business as they will be in capable hands.

Estate planning is a highly complex area of law. If you are interested in creating a trust for your family business or have any questions regarding your current estate plan, please contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information. The attorneys at Lonich Patton Erlich Policastri have decades of experience handling complex estate planning matters, including family business trusts, and we are happy to offer you a free consultation. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Source: Charles D. Fox, Keeping It In The Family: Business Succession Planning, SS039 ALI-ABA (2011)

Your Business Exit strategy should start today

July 15, 2014/in Business Law, Estate Planning /by Michael Lonich

If you draft a will in order to ensure that your heirs are taken care, developing a business succession plan will ensure your company continues to thrive after you are gone.

As the economy slowly emerges from the shadow of The Great Recession of 2009, businesses are also starting to thrive again. While storefront businesses are still a staple of the American dream, use of the internet and the relatively low cost of creating a website and selling a unique product or idea has lowered the barrier to entry for entrepreneurs who wish to start a family business.

If you own or are starting a family business, you are in good company: Forbes estimates that family businesses account for 50 percent of the current Gross Domestic Product in the U.S. This includes 35 percent of Fortune 500 companies (the top 500 U.S. publicly and privately held companies ranked by their gross revenue and published by Fortune magazine) that are controlled exclusively by families.

However, there is a problem with the family business model. According to a Pricewaterhouse Coopers survey, only 52 percent of family businesses expect members of the next generation to be able to run their business. Junior members lack of experience for running a company coupled with poor succession planning are the main culprits.

Get a Prenup for Your Business

If a premarital agreement can reduce headache and anxiety in the event of a divorce, then a similar mechanism for a family business – labeled a Shareholder’s Agreement* – will reduce anxiety and hard feelings when it becomes necessary to distribute assets or make tough decisions regarding the family business.

An agreement among shareholders or family owners lays the ground rules of a family business in terms of important topics such as governance, succession, transfer of assets, liquidity and taxes among others. A Shareholder’s Agreement may address such questions as:

Board composition:
- Will each sibling be represented?
- Will there be a board of directors?
- Will executives from outside the family be allowed?
- What training experience will be required?
Decision-making process:
- What is the number of votes needed to approve key issues?
- What is the method for dispute resolution?
- What are the rights of family members?
- Family members not involved in the business?
- Non-family involved in the business?
Business and Owner Estate Plan:
- Who are the business successors (both managers and owners of the business)?
- What is the compensation for owners?
- What is the remaining profit distribution?
- What are the taxation implications upon sale or transfer of ownership?
- Is there an estate plan? Is it in writing? Is there a timeline for implementation?

Although many small businesses fail, by addressing these issues a small business owner takes steps towards ensuring his or her family’s interests while saving money, and avoiding conflict.

Careful estate planning can ensure that a family business continues to benefit family members and that ownership of the business is not diluted until the business is ready to accept outside investors. Owners’ estate plans should use trusts or other mechanisms to restrict the ability of their heirs to transfer shares. A successful family business is an excellent means to provide financial security for the small business owner and his or her loved ones as well as employment opportunities for interested family members.

Estate planning is a complex field. Whether you are concerned with devising a plan for either a family estate or that of a business, it is important to get good advice. The attorneys at Lonich Patton Erlich Policastri have decades of experience handling complex estate planning matters including business succession plans, wills, and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information as we are happy to offer you a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

*Source

How to Keep the Family Baggage Out of the Family Business

February 20, 2014/in Business Law, Estate Planning /by Michael Lonich

Family businesses are often the pride and joy of the entrepreneurs who created them – especially if the business has flourished and has been passed down for multiple generations. However, no matter how successful a company is or how many generations it has survived, conflicts can significantly undermine the company’s continued success. Some of the reasons many family businesses run into conflict are over:

Company Resources: Money, money, money. Historically heralded as the root of all evil, money is often at the root of all family business troubles. Resources are limited and folks must be compensated, leaving plenty of opportunity to squabble over nickels and dimes.
Company Strategy: Strategy is a substantial part of running a successful business. Without a similar outlook with regard to strategy, the business will remain at a standstill. Sometimes, discussions regarding strategy will cause disputes because one family member may believe that Strategy A is the best course of business, whereas another family member vehemently believes that Strategy B is far superior.
Company Values: Often times, interests and values will change over time, and family members from different generations will value different aspects of the business. Family members running a family business must have the same outlook for the company and aim to reach the same goals. Otherwise, the business will remain stagnant until these differences are resolved.
Company Rivalry: Just like sibling rivalry is very real, so are rivalries within a family business – so much so that the best interests of a company can take a backseat to upstaging a competing family member.

So with all these possible issues of contention, how can a family successfully run a family business without the family baggage? Here are some options to consider implementing:

Appoint independent directors: Having independent directors will ensure that someone with an objective perspective is monitoring the family and offsetting any improper family influences. The family will monitor management, and this independent third party will monitor the family.
Hold regular family meetings: Don’t wait for issues to arise before scheduling a meeting – have them regularly and in taking such preventative measures, perhaps some conflicts can be avoided altogether. Specifically include shareholder sand those who influence the decision-makers.
Evaluate performances: By evaluating performances, the business can have an objective look at how employees are performing (or not performing). This ensures that employees are promoted and compensated not for their familial relationships, but for their commendable performance.
Talk to a professional: Have a professional evaluate your family business – perhaps they can help your family build a business succession plan and help resolve other issues involved in your family business.

Business succession planning is a highly complex area of law. If you have any questions regarding your family-owned business, please contact the experienced business attorneys at Lonich Patton Erlich Policastri for further information. The attorneys at Lonich Patton Erlich Policastri have decades of experience handling complex business succession matters and we are happy to offer you a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Source: http://www.bizactions.com/n.cfm/page/e110/key/254350972G1005J3585631N0P43P2122T3/

Protecting the Hand-Me-Down Business

February 12, 2013/in Business Law, Estate Planning /by Michael Lonich

Big businesses routinely have succession plans in place. Do smaller family-owned businesses? Infrequently, which is surprising and unfortunate. Without well thought-out succession plans in place, many family-owned businesses cease to exist.

To be sure, many family business owners would love to eventually “pass the torch” to a son or daughter. But what will happen in the event of sudden death or disability before they are ready to accept the responsibility? It is in the best interest of all parties involved that a proper estate plan is in place to avoid probate of business assets. The probate process is expensive, may take upwards of two years, lacks privacy, and takes nearly all control out of your family’s hands. Additionally, a plan could eliminate potentially crippling estate taxes on the business.

A business is a sophisticated property interest. For an owner of a small family business, however, the business is more than just a source of income—it represents the history and livelihood of their clan. With adequate planning, the business and its value may be protected, perhaps by creating a family limited partnership or by placing the family’s assets into a living trust. There can be significant estate tax advantages to creating a limited partnership for your family business and transferring minority interests to future inheritors.

Estate planning is a complex field. Whether you are concerned with devising a plan for either a family estate or that of a business, it is important to get good advice. The attorneys at Lonich Patton Erlich Policastri have decades of experience handling complex estate planning matters including business succession plans, wills, and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Estate Planning Considerations for Family Business Owners

January 12, 2012/in Estate Planning /by Michael Lonich

Family business owners should take extra care to ensure that their interests are protected. Most business owners’ shares represent a large part of their estate’s value. However, few take the time to lock in valuable estate planning benefits that come in the form of a buy-sell agreement.

A buy-sell agreement can help protect an owner’s business interest by ensuring they do not lose control of their ventures and protect their heirs by restricting shareholders, partners, or members of a business from unilaterally transferring an ownership interest to anyone outside the group. Further, since the death of a co-owner could have a disastrous effect on the finances of a business, life insurance policies covering the lives of co-owners generally form the financial backbone of any buy-sell agreement. A buy-sell agreement that is not covered by life insurance death benefits should specify that a buyout should be made under a multi-year installment payment arrangement, which provides remaining co-owners with the flexibility to fund the buyout.

Without a buy-sell agreement, the result on the deceased co-owner’s estate could be drastic. First, there may be no market for the remaining business ownership interest left by the deceased co-owner—the proceeds of which might be necessary to pay estate taxes. Second, heirs of the deceased co-owner will be left to work with the IRS to value the deceased’s share of the business for estate tax purposes, an expensive and time-consuming affair. With a buy-sell agreement, however, a business ownership interest can be sold under pre-approved financial terms and the price set also establishes the (realistic) value of the business ownership interest for estate tax purposes.

If not drafted carefully, the IRS can disregard the buy-sell agreement. To ensure that your buy-sell agreement will withstand IRS scrutiny, please contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information on these types of transactions. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

How Can Business Succession Planning Help You Pass Your Company On to Your Children?

March 11, 2011/in Estate Planning /by Michael Lonich

A business succession plan can help you hand your business over to your family’s next generation by looking at whether or not your company has adequate resources and potential. If your business does not presently have the qualities required to pass on to your children, an attorney can help you investigate whether the necessary resources and potential can be developed.

An estate planning attorney can help you develop a quality business succession plan that meets your needs. Specifically, an estate planning lawyer can help you use instruments such as revocable trusts, irrevocable trusts, and charitable trusts to own and control the equity interests of your business. In addition, your attorney can help you minimize the impact of local, state, and federal taxes on business and estate planning transactions to conserve the assets of the company.

For more information on developing a successful plan to pass on your business after your death, please visit the Lonich Patton Erlich Policastri website. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Posts

IRS Withdraws Its Support of The Proposed Change to The Estate Tax Valuation Rules

Transferring The Family Business, But To Which Child?

Your Business Exit strategy should start today

How to Keep the Family Baggage Out of the Family Business

Protecting the Hand-Me-Down Business

Estate Planning Considerations for Family Business Owners

How Can Business Succession Planning Help You Pass Your Company On to Your Children?

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