|
YOU
HAVE AN ESTATE, AND YOU HAVE AN ESTATE PLAN
Your
estate consists of every asset you own, including the death benefit
of any life insurance policies. You have an estate right now;
dying is not a prerequisite to having an estate. An estate plan
is a plan that controls your estate, and your person, when you
cannot do so for yourself. An estate plan is most commonly used
in cases of disability and death. If you have not written your
own estate plan, the State of Texas has written one for you. Please
review our available free downloads located at the bottom of this
page for more information on estate planning.
BUSINESS
OWNERS ARE DIFFERENT
The
estate plan of a business owner differs from other estates. Others
have to be concerned with themselves, their family and loved ones.
Business owners must take into account all of those, plus take
care of the business as an entity, its employees, any others that
rely on the business to make a living, and all co-owners. Business
owners also must make sure that estate taxes do not prevent their
plan from being implemented.
ESTATE
TAXES: DOWN BUT NOT OUT
Although
the estate tax is being phased out through 2011, it is scheduled
to return in 2012. The law is still in flux and there are significant
efforts in Congress to further change them. The only way to plan
an estate in this uncertainty is to presume that the current law
will not change. Doing nothing until something else happens is
very risky because it is quite possible that nothing else will
happen.There
are ways to plan to pay any tax that may be due, and ways to reduce
the amount of any estate tax that will be due. Larger estates
typically require a longer period of time to reduce estate taxes.
The 2 most critical goals of estate tax planning for business
owners are:
-
make sure any estate taxes due will not require a forced sale
of the business (or business ownership) to raise the cash needed
to pay the tax; and
-
make sure the cash needs of the surviving family members are
met after payment of any estate taxes.
BUSINESS
SUCCESSION PLANNING
A
business owner's estate must determine who will succeed the owner.
Business succession planning deals with these questions:
- who gets control of the business when something happens to an
owner (death or disability)?how
much money will be exchanged (it can be a set amount or fixed
by formula)?how
will that amount be paid?
- what
are the income tax consequences to any change in ownership?
FAILING
TO BE YOUR BROTHER'S KEEPER CAN COST YOU
One
of the most often overlooked parts of an estate plan is the effect
of a co-owner's failure to plan their estate, or more generally
the effect of one business owner's estate plan on other co-owners.
For example, it is possible for a co-owner to be replaced by the
co-owner's spouse (even an ex-spouse, theoretically), or their
children, or lender(s), or even a stranger. These may know little
to nothing about how the business makes money. Since the relationship
between co-owners is critical to many closely held businesses,
a business owner's estate plan should control this relationship,
and not leave it to chance. A "Buy-Sell Agreement" can
address these concerns.
BUY-SELL
AGREEMENTS
In
its broadest sense, a Buy-Sell Agreement is a written agreement
between two or more persons concerning a business. In some instances
the business is a party to the agreement also.Owning
stock in a publicly traded company such as Exxon/Mobil is one
thing, but owning a closely held business is quite another. For
example, to sell Exxon/Mobil ownership (stock), you simply call
your local broker and place your order, because there is a ready
market for the stock. Not so with a closely held business. There
is no market for its ownership. A buy-sell agreement may control
the transfer of ownership of the business, and if funded with
a life insurance policy, may also provide the cash to buy the
ownership, which together creates a market for the ownership.If
a stockholder of Exxon/Mobil stock suffers financial hardship
and a judgment creditor seizes the stock and sells it, Exxon/Mobil's
ability to operate is not affected. Likewise, if a stockholder
of Exxon/Mobil goes through a divorce and the court awards the
stock to the ex-spouse, Exxon/Mobil is not affected. However,
in a closely held business any of these scenarios can cripple
the business. A mechanism is needed to preserve the original integrity
of the ownership and provide continuity for the business, and
a buy-sell agreement can be that mechanism.TYPICAL
PROVISIONSA
buy-sell agreement typically addresses control of the business,
and transfer of ownership, and often includes the following as
well:
- events
triggering the sale of ownership, such as the death, disability,
mental incapacity, divorce, insolvency or bankruptcy of an owner,
the involuntary attachment of an owner's assets, and any other
involuntary transfer of ownership by an owner
- restrictions
on the sale of ownership to certain individuals who typically
are active in the business or are already an owner
- rights
of first refusal for the benefit of the remaining owners
- determination
of the purchase price
- mechanics
of giving notice to other owners of a transfer of ownership,
and closing the transfer
- financing
the purchase obligations
- remedies
in the event of breach or default
- pre-emptive
rights in the event the business issues additional stock
- non-disclosure
agreements that kick in upon an owner being bought out and/or
whose employment is terminated
- allocation
of federal and state tax consequences among the entity, the
selling owner, and the remaining owners
- modification
or termination of the agreement under future circumstances
- notice
and information required to be given to third parties so the
desired transaction is binding upon them
- how
disputes will be resolved
ESTATES
WE REPRESENT
We
counsel estates of widely different fair market values, because
businesses owned by our clients have widely different values.
The size of the estate primarily affects estate tax planning.
Most other concerns involved in a business owner's estate are
present in every business owner's estate.
FOR
MORE INFORMATION
There
are free downloads on our Business Owner's
Resource Center page for more helpful information on estate
planning for business owners. Each booklet answers frequently
asked questions and will further educate you about various planning
concepts.
CONTACT US
Please
E-mail us for more information,
or if we may be of service to you in planning your estate. |
