Except for bankruptcy, is it easier to get into than out of business? If so, then do some serious planning to keep that hard earned asset from being wasted. A Cornell study estimated that property in excess of $10 trillion is due to change hands during the next twenty years. With a treasure like that, could it be better protected? Since wealthy folks have a legion of tax advisors coaching them on ways to avoid problems, it turns out that middle and upper-middle class taxpayers’ estates are due to take the biggest percentage of hits. Appreciated assets gathered through years of hard work, great planning or just plain luck will experience major erosion. Those losses occur because of poor planning and are generally avoidable. When the Depression era generation passes the torch to the baby-boomers, you can bet the IRS will be there for its cut, and a hefty one it is. The main goal for families affected by this generational shift in capital is to preserve value and options without paying unnecessary taxes and expenses.
Of course the IRS has a little something to say about techniques designed to reduce the tax bite. The good news is that limiting tax exposure works for everyone, but it takes action. Since liquidity is a problem for even the largest estates, a going concern needs a ready buyer to convert illiquid family businesses to cash. Good buyers could include family members, insurance trusts, key employees or competitors. Unfortunately, this solution is rarely available, since getting the best price for a business that just lost the “rainmaker” is difficult. As long as few businesses can survive without top management responsible for its profit potential, it makes sense to plan ahead. One of the best tools used to control a closely held business without a ready market is the buy-sell agreement. This arrangement is designed to avoid major shocks to management when a principal owner steps out of the picture. Triggered by retirement, death or disability, almost everyone agrees a contract provides certainty; but who really profits from a well-designed agreement?
· The family, since a fair price has already been negotiated and the funding secured for a business that has provided them with years of financial support.
· The employees are reassured that jobs will be preserved so they can concentrate on keeping the business working and profitable.
· Creditors and customers like the idea of continuity and are more likely to work with the new owners.
· The estate, because an upper limit on the asset’s value may restrict the IRS’s ability to inflate the estate and run up the tax bill.
Since disputes about valuing the business are a major source of challenges by the IRS, it makes sense to avoid future conflicts when possible. Best ways to do that? Have plenty of documentation by qualified and independent appraisers establishing fair market value.
Owners often try to pass the business to heirs by using excessively low values in order to save taxes. Although any unorthodox formula designed to skirt the issue of fair market value signals the IRS to audit the estate tax return, there are ways to discount values. Since the IRS views with a jaundiced eye any family valuation process that favors heirs, take extra care to keep the IRS camel from getting its nose under the tent. A good example of the problem encountered by the cosmetics manufacturer, Est‚e Lauder, shows what happens when poorly thought out agreements are used. The Lauder family had a buy-sell agreement, but failed to meet all of the criteria for proper valuations. Guidelines should include a fixed and determinable price, a binding agreement on all parties both before and after death, and a genuine business purpose in order to be valid. Family deals also have an extra burden of appraising value based on an arm’s length arrangement. These errors led the tax court to award the IRS an extra $42.7 million in settling the Lauder’s estate. Improperly done, even legally binding agreements that should establish value may still be set aside as the IRS establishes a higher value for the business. Since estate taxes routinely take 50% of the value of an ongoing operation, a solid succession plan needs to be in place or you can kiss the business good-bye. On the other hand, there are good opportunities to effectively pass a going concern to your heirs in an orderly fashion. For example, due to tax law changes in 1993, the Family Limited Partnership (FLP) has been used to maintain control and income, while passing tax liability to the next generation. However, in order for the FLP to work as desired, the planning and valuation process is critical for success. The decision to take advantage of little known tools and preserve options is yours. Why not save the family some money and disinherit the IRS?
Failing to stabilize and protect estate values is one of the classic errors in most estate plans. Avoid this situation
by consulting your tax, financial and legal advisors.
Disinherit the IRS
Preserve Family Wealth and Assets
Protect Closely-Held Businesses
Eliminate Unnecessary Expenses and Taxes
Tools and Techniques for Controlling Social Capital and Creating Family Dynasties.
Vaughn W. Henry Henry & Associates Gift and Estate Planning Services
22 Hyde Park
Springfield, IL 62703 USA
Phone: (217) 529-1958 Fax: (217) 529-1959
E-mail: VWHenry@aol.com
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