business succession planning for estate planners (60 … · anticipating and mitigating family...
TRANSCRIPT
BUSINESS SUCCESSION PLANNING FOR ESTATE PLANNERS
First Run Broadcast: October 26, 2016
1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)
One of the biggest challenges common to most family businesses is succession. Who’s next?
After a founder chooses to retire, or forced into it by disability or incapacity, or dies, who among
the next generation can step competently into senior leadership, preserve the economic value of
the company, and do so without creating a rupture in the family? Many successful family
businesses founder because this process is not carefully planned and executed. And succession
planning is an inseparable part of trust and estate planning. Without succession planning, all the
elaborate transfer and tax plans are without a goal. This program will provide you with a process
for anticipating and techniques for mitigating family drama in succession planning, and discuss
several practical alternatives for transferring control and ownership.
Anticipating and mitigating family drama in succession planning
Common drama triggers – lack of communication, income expectations of family
members, intra-family strife
Planning for phased withdrawal of a senior generation using lifetime gifting
Use of buy-sell agreements with key family and non-family members
Sales to third-parties where an equitable or peaceable within the family is not possible
Planning for the disability or incapacity of key members of the senior generation
Issues involving key non-family member employees and their retention in the succession
Speakers:
David T. Leibell is Senior Wealth Strategist at UBS Private Wealth Management in New York
City, where he provides clients comprehensive strategies to assist in the preservation, transfer
and management of wealth. He also serves as an internal resource for UBS clients on all issues
related to tax, estate planning, philanthropy and wealth planning. He is chairman of the Family
Business Committee for Trusts and Estates Magazine and is listed in “The Best Lawyers in
America” for two practice areas— Trusts and Estates and Charities/Non Profits. Before joining
UBS, he was a partner in the Private Client Services Department of Wiggin and Dana, LLP in
Greenwich, Connecticut. Mr. Leibell received his B.A. from Trinity College and his J.D. from
Fordham Law School.
Daniel L. Daniels is a partner in the Greenwich, Connecticut office of Wiggin and Dana, LLP,
where his practice focuses on representing business owners, corporate executives and other
wealthy individuals and their families. A Fellow of the American College of Trust and Estate
Counsel, he is listed in “The Best Lawyers in America,” and has been named by “Worth”
magazine as one of the Top 100 Lawyers in the United States representing affluent individuals.
Mr. Daniels is co-author of a monthly column in “Trusts and Estates” magazine. Mr. Daniels
received his A.B., summa cum laude, from Dartmouth College and received his J.D., with
honors, from Harvard Law School.
VT Bar Association Continuing Legal Education Registration Form
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Business Succession Planning for Estate Planners Teleseminar
October 26, 2016 1:00PM – 2:00PM
1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________
VBA Members $75 Non-VBA Members $115
NO REFUNDS AFTER October 19, 2016
Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: October 26, 2016 Seminar Title: Business Succession Planning for Estate Planners Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
Estate Planning for
the Closely Held
Business Owner
Daniel L. Daniels and
Michael T. Clear
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• Special Challenges for Succession Planning for Closely Held Businesses
• Analysis / Paralysis
• Phased Based Planning
Introduction
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• Tax efficient wills and revocable trust agreements
• Fiduciary role education and selection
• Probate avoidance
• Anti-divorce planning
• Incapacity planning
• Asset protection / entity choice
• Shareholder agreement
Phase One Planning: Key Elements
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• Airtight Transfer Tax System
• Leaks in the System – Freezing Value
– Discounting Value
– Removing Value
Phase Two Planning: Lifetime Gifting
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• Spousal Lifetime Access Trusts (SLAT)
• Sale to Intentionally Defective Irrevocable Trust (IDIT)
• Grantor Retained Annuity Trusts (GRAT)
Phase Two Planning: Typical Strategies for
Business Owners
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• Trust with spouse and descendants as beneficiaries
• Used for freezing, discounting and removing values
• Benefits – Estate reduction
– Simple to create and administer
– Continuing access and control for grantor’s spouse
– Grantor Trust
– Generation skipping
Phase Two Planning: SLAT
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• Business owner establishes SLAT (or other irrevocable trust)
• Business owner makes a gift to the SLAT (e.g. $2 million)
• Sometime later, business owner sells an interest in business to the SLAT in return for the SLAT’s promissory note
– Note provides for payment of interest-only for 9 years with a balloon payment of principal due at the end of the 9 year term
– Interest rate is set at the lowest rate permitted under the tax code (June rate is 1.41%, example uses April rate of 1.45%)
– For this example, assume enterprise value of LP interest is $15 million but 33% valuation discount is applied so that the value for purposes of the sale transaction is $10 million
Phase Two Planning: IDIT Sale
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Estate Planning for the Closely Held Business Owner
Step 1: Seed Capital Gift of $2 million to SLAT
Business Owner SLAT
$2 million gift
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Estate Planning for the Closely Held Business Owner
Step 2: Business owner sells limited partnership interest
appraised at $10 million to SLAT for SLAT’s $10 million
promissory note
Business Owner
LP Interest
SLAT
$2 million
Note
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Estate Planning for the Closely Held Business Owner
Step 3: SLAT Uses Partnership Distributions to Service Note
Business Owner
($10 mm
Promissory
Note)
SLAT
(LP Interest
Subject to
$10 mm Note)
Interest and
principal
payments
Limited
Partnership
Partnership
Distributions $$
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Numerical Example: LP Interest Grows and/or Produces
Income Greater Than Debt Service
Estate Planning for the Closely Held Business Owner
Initial value of property $15,000,000
Valuation discount 33%
Discounted value of property $10,000,000
Interest rate on promissory note 1.45%
Assumed rate of return 5.00%
Year Beginning Value Return Note payment End Value
1 $15,000,000 $750,000 ($145,000) $15,605,000
2 $15,605,000 $780,250 ($145,000) $16,240,250
3 $16,240,250 $812,013 ($145,000) $16,907,263
4 $16,907,263 $845,363 ($145,000) $17,607,626
5 $17,607,626 $880,381 ($145,000) $18,343,007
6 $18,343,007 $917,150 ($145,000) $19,115,157
7 $19,115,157 $955,758 ($145,000) $19,925,915
8 $19,925,915 $996,296 ($145,000) $20,777,211
9 $20,777,211 $1,038,861 ($10,145,000) $11,671,071
Value Removed From Taxable Estate (in SLAT): $11,671,071
Approximate Estate Tax Savings: $5,835,536
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• IRS may treat a portion of the sale as a gift
• Remote risk that IRS would treat entire transfer as a gift
• If transaction not administered carefully, risk that IRS will bring the entire trust back into the business owner’s estate at death
• If grantor trust status turned off while the note is outstanding or during any period in which the trust has “negative basis” assets, taxable income will be recognized
• If note remains unpaid at business owner’s death, there may be capital gains tax on the unpaid balance at that time
• A gift tax return should be filed reporting both the seed capital gift and the sale transaction
Phase Two Planning: IDIT Sale: Tax
Considerations
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• Trust with spouse and descendants as beneficiaries
• Used for freezing, discounting and removing values
• Benefits – Estate reduction
– Simple to create and administer
– Continuing access and control for grantor’s spouse
– Grantor Trust
– Generation skipping?
Phase Two Planning: GRAT
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Zeroed-Out GRAT
• Grantor transfers $1 million to a GRAT when IRS assumed interest rate = 1.4%
• Grantor receives $119,000 annually for 9 years
• After 9 years, remaining GRAT funds pass to children
• Value of taxable gift is near $0
Phase Two Planning: GRAT
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Savings Dependent on Investment Performance
Average Return Amount Passing Tax Free
1.4% $0
4.0% $164,000
6.0% $322,000
8.0% $513,000
Phase Two Planning: GRAT
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Property suitable for a GRAT
• Growth stocks
• Commercial real estate
• Closely held business
• LLCs and LLP
Phase Two Planning: GRAT
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• Grantor dies before termination of GRAT – At worst, property taxable in grantor’s estate
– Nothing gained, but nothing lost
• Investment underperforms IRS assumed rate – Nothing gained, but nothing lost
– Grantor receives $119,000 annually for 9 years
Phase Two Planning: GRAT Risks
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Daniel L. Daniels is a partner in Wiggin and Dana's Private Client Services Department and a member of the firm's Executive Committee. He divides his time between the firm's Greenwich and New York offices. Dan focuses his practice representing business owners, private equity and hedge fund founders, family offices and other wealthy individuals and their families. He received his A.B., summa cum laude, from Dartmouth and his J.D., cum laude from Harvard Law School. [email protected] 203-363-7665
Daniel L. Daniels
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Michael T. Clear is a partner in Wiggin and Dana's Private Client Services Department. Michael focuses his practice on estate planning, estate and trust administration, probate litigation and business succession planning. He guides fiduciaries and beneficiaries through estate settlement and trust administration matters. His estate and trust administration practice often intertwines with his probate litigation practice where he advises clients in will and trust construction cases, contested accounting proceedings, fiduciary removal proceedings, payment of unpaid claims and conservatorship and guardianship matters. Michael received his J.D. magna cum laude from the Quinnipiac University School of Law. [email protected] 203-363-7675
Michael T. Clear
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Wiggin and Dana LLP is a full-service law firm of approximately 150 lawyers with offices in the Northeast, including Connecticut, New York, Philadelphia and Washington, DC. Since its founding in 1934, the Firm has served the legal needs of entrepreneurs, corporate executives and other wealthy individuals and their families, as well as charitable and educational institutions, emerging companies, middle market business organizations and Fortune 500 corporations.
Wiggin and Dana
Estate Planning for the Closely Held Business Owner
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Speaker Contact Information
BUSINESS SUCCESSION PLANNING FOR ESTATE PLANNERS
David T. Leibell
UBS Private Wealth Management – New York City
(o) (212) 821-7063 [email protected]
Daniel L. Daniels
Wiggin & Dana, LLP - Greenwich, Connecticut (o) 203-363-7665