Wealth Planning & Wealth Preservation Update
August 2009
Greetings!

We are pleased to provide the next issue of the Wealth Planning and Preservation Update just as summer turns to fall and children return to school. As with the changes of seasons, the economic climate in America is in the midst of ongoing changes which should be continuously monitored by individuals and businesses who are interested in protecting their existing interests and capitalizing on new opportunities. Read below to discover how thoughtful, proactive planning can go a long way in achieving these goals.

As always, we welcome your feedback and topic suggestions for future newsletters.If you would like to speak to one of our attorneys about your or your clients' wealth preservation plan, please click here to send us an email. 
Planning for Changes to Come

Planning for Changes to Come

As the economy continues to stabilize, planning considerations should begin to shift to a strategy that is more focused on anticipation of changes that are likely to have an effect on individuals and businesses.  There are a multitude of factors which will impact tax and estate planning strategies in the next few years.

Without question, income taxes are going up for wealthier Americans. While the Obama administration has indicated that only married taxpayers having an adjusted gross income above $250,000 need to worry about seeing an income tax increase, any chance of reducing the exploding deficit will require higher taxes at lower levels, perhaps as low as $100,000 (which is still only the top 10% of income earners).

But it is not just income taxes that are going up. The 2009 Social Security Trustees report describes a dismal future for Social Security.  The Obama administration believes that increases in social security taxes are going to be necessary. There may be both an increase in the number of people paying social security taxes (i.e., by eliminating exceptions and loopholes to the tax) and an increase in the actual tax cost through such measures as increasing the FICA wage cap ($106,800 in 2009).

Although the current budget proposal indicates that the estate tax exemption may remain at $3.5 million (and with a 45% flat estate tax) for the foreseeable future, the issue is not settled. It seems inconsistent for Congress to be moving toward higher income taxes for the rich, while providing significant estate tax relief. It now appears that Congress is putting off any estate tax legislation until the fall. It is unlikely that a Democrat controlled Congress would decide to let the 2001 estate tax rules expire in 2011. However, the loss of estate tax revenue for one year in 2010 would be nominal even if nothing was done this year with regard to estate tax reform, when you consider how quickly it could be recovered by the higher estate tax rates (e.g., 55% over $3.0 million) and lower estate exemptions (i.e., $1.0 million) beginning in 2011. Therefore, the situation should be monitored closely.

Interest rates are bound to go up as the economy begins to recover and the deficit begins to have an impact on the cost of capital. With an increase in interest rates will come higher operational costs for businesses that rely upon borrowing for capital sourcing, reducing the value of those businesses in relative terms. Moreover, many of the tax planning techniques currently in vogue (which take advantage of the current low interest rates) will become less viable. Anticipating higher IRS interest rates in the near term can offer some interesting tax planning advantages. For example, assume you create a charitable lead trust using today's low interest rates, but anticipate higher returns on trust assets in the future. If the expectation is correct, it could significantly increase the passage of assets to heirs.
Business Continuity Planning For Closely Held and Family Businesses

Continuity PlanningIf you are the owner of a closely-held business, it is likely that your business comprises a significant portion of your net worth and/or your income producing capability. In that context, it is important to evaluate options available to you in the event that you do not want or cannot physically maintain operational control over the business. Retirement, death, or prolonged disability of the major owner can dramatically impact a closely-held business. Planning for these eventualities in advance of their occurrence, therefore, is something no business owner can afford to ignore.
 
An owner of a closely-held business has basically one of three decisions to make relative to the disposition of his or her business interest in the event of death, disability or living withdrawal (retirement) from his or her business. He can elect to keep the business (i.e., retain ownership for him or herself, or for family), sell the business interest, or make no decision. Obviously, the first two decisions allow the owner to create a plan for the retention or sale of the business. To make no decision only defers to a later time and, perhaps, diverts to other individuals the responsibility of making the ultimate decision to retain or sell the business asset.
 
The purpose of this article is to explore the keep-sell decision and to evaluate factors which contribute to the planning strategy ultimately selected.
 
The Plan to Keep the Business
 
The impact of the decision to retain ownership of the business interest will vary depending upon whether the event in question is the owner's death, disability or retirement. Needless to say there are potentially many concerns that should receive focused attention when planning to retain the business asset.
 
Planning techniques to assist the owner in his or her retention objective are too numerous to detail here. However, some which are common include:
 
Death Planning
  1. Recapitalize the business. The owner retains Preferred Stock and the children receive Common Stock. Future appreciation is absorbed by the common stockholders, thus limiting the estate taxable value of the parent's stock.

  2. Execute a will and trust that specifically provide for business successor ownership and management, to include the power given to the trustee to retain the business as a working investment of the trust.

  3. Provide adequate liquidity in the estate to pay due debts, taxes and expenses so as to avoid a forced sale of the business to raise the necessary cash.

  4. Create an "equalization" trust, funded by non-business property, which can provide assets to family members who will not be actively involved in ongoing business management and control.

  5. Maintain a program of life insurance which, when combined with other non-business property, will be sufficient to: a) provide the owner's surviving spouse and family adequate income, b) satisfy creditors if cash flow is interrupted by the owner's death, and c) offer "keyman" indemnification to the business until successor management has gained necessary experience and expertise to assume the deceased owner's role.
Disability Planning
  1. Create a formal Salary Continuation program wherein the business would pay to the disabled owner-employee reasonable amounts of compensation during the months or years of disability.

  2. Maintain individual and/or group Disability Insurance benefits - so as to provide the owner a base of monthly income without placing unnecessary strain on business cash flow.

  3. Provide for disability benefits as an optional feature of the company's qualified retirement plan.
 
Retirement Planning 
  1. Take advantage of deferred compensation techniques which allow significant tax-deductible deposits to accumulate on a tax deferred basis until the owner's retirement, at which time retirement plan income can replace earned compensation.

  2. Provide incentives for key personnel to remain active in the business after the owner's official retirement. Incentives might include individually designed fringe benefits (i.e. non-qualified deferred compensation to be paid to the key person at a target date), officer status, stock appreciation rights (future compensation related to improvement in the net worth of the company), and interest free loans from the company to the key person.

  3. If the business is a Corporation, the election to have Corporate profits taxed directly to the shareholder (Sub-S election) allows the retired, inactive business owner to receive dividends from the company without exposing them both to Corporate and Personal tax brackets. Also, the owner need not be employed to justify this income.
The Plan to Sell the Business
 
Closed corporations, LLCs, and partnerships, in which the personal services of the owners are essential to the success of the business, are normally formed or entered into because of the particular skills and personalities of the parties. Naturally, free substitution or transfer of ownership is sometimes not only undesirable but potentially dangerous to the successful ongoing operation of the business.
 
For this and other reasons, the decision to keep the business is not always wise, or practical. The alternative is to create a plan to sell the business asset, in part or in its entirety, when the owner is no longer actively employed. Again, this decision triggers a number of planning questions, the answers to which can form a meaningful track on which to build the plan to sell the business assets: 
  1. Should there be a written agreement? (i.e. purchase and sales or "buy-sell" agreement)

  2. Who should be the buyer?

  3. What should be the purchase price?

  4. How should the purchase price be paid out (terms)?

  5. How will the buyer obtain funds for the buyout?

  6. In what events should the buy-out take place (death, disability, retirement, or other living withdrawal)?

  7. What will be the tax affects to the buyer/seller?

  8. Should the agreement "peg" the business value for estate tax treatment (death buyout)?

  9. How will the proceeds of the buy-sell be invested?

  10. Should the buy-sell agreement contain noncompete clauses?

  11. Following the sale, who will control the business?

  12. Should insurance assets be utilized to fund the agreement in the event of a death or disability? How about the use of a sinking fund?

  13. How will creditors of the business impact upon the satisfactory completion of the buyout?

  14. Should the buy-out be optional or mandatory on the part of the proposed buyer/seller?

  15. How should the agreement reflect future changes in the value of the business? 
A well conceived purchase and sales agreement considers each of these questions, among others, and attempts to provide meaningful answers through its well-drafted provisions. Lucky is the closely-held business owner who, having decided to sell his or her business at death, disability, or retirement, can establish a ready market for his or her interest, obtain a fair value, and be able to plan on the cash being there when it is needed to fulfill the terms of the buy-out.
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This publication is intended for general information purposes only. It is not intended to constitute individual legal advice to any specific client. 
About Morris Law Group

Morris Law Group is an estate, asset protection and business planning boutique law firm that practices exclusively in estate and gift tax planning, wills and trusts, business structuring and succession planning, asset protection, probate, planning techniques for highly compensated individuals, and national and international tax planning. Morris Law Group is dedicated to helping individuals and families preserve their wealth for future generations, maximizing inheritances and minimizing taxes.

Morris Law Group has earned the trust and respect of its clients by educating them on technical aspects of the law in an understandable manner, and by providing the highest level of personal and discreet service. Morris Law Group proudly offers highly skilled legal counsel with a keen understanding of individual, family, and business needs. Morris Law Group has achieved an AV Peer Review Rating, the highest rating afforded, from Martindale-Hubbell. The firm has four offices strategically located throughout South Florida in Boca Raton, Aventura, Weston and West Palm Beach to provide convenient service to clients in Palm Beach, Broward and Dade counties and from across the country.

Read more about the Morris Law Group attorneys.
 
Click here to email Stuart R. Morris, Esq.
Click here to email Gregory S. Bloshinsky, Esq.
Click here to email Jesse H. Little, Esq. 
In This Issue
Using an Irrevocable Life Insurance Trust as Part of an Effective Estate Plan
Are Your Beneficiary Designations Up to Date?
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