Owners Of Businesses Should Consider Creating A Succession Plan: Don't Let Your Business Become An Orphan

The New York Times recently had a guest article entitled "Is My Family Business Going To Be An Orphan?" written by an entrepreneur who owns five businesses. It is insightful  since the writer held a meeting with his family to discuss succession and shares his experience.


The general school of thought is that  small business owners and professional businesses should start succession planning 5 to 10 years before the anticipated transition. We also want clients to consider what happens if if they become disabled or pass away before that time. Does anyone want their business to be passed through a will (not recommended) or without one?


Why does this important business plan get delayed? Many business owners are so focused on day-to-day business operations that they fail to invest the time to develop a succession strategy. Each company is different but we like to ask some basic questions to help clients focus on their goals: Is most of the client's estate tied up in the business? Is there a spouse or children to support after the owner's death or disability? Are there any family members working in the business? Does the business require special licensure to own and operate the business (medical practice for example)?


When we meet with business owners, we combine estate planning with corporate and financial considerations so that the client can consider all options. Options can include selling, transitioning to a family member or business partner, or dissolving the business. Many complex issues should be evaluated during succession planning before coming to a decision because each business is different.


Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can email Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com

How Do You Prepare Your Business For Succession As Part Of Your Estate Plan?

On March 17, 2010, the New York Times had an article entitled "How To Prepare Your Business For Succession." Even though there is no estate tax at the moment in 2010, the article touches on many of the non-tax issues which should be addressed by any family business owner irrespective of its form (corporation, LLC or partnership).

Previously, I wrote on this subject last year on a post entitled "As A Business Owner, What do I Need To Consider When Planning My Estate?"

The article mainly addresses the business related points of how to avoid a succession disaster. It recommends the following ideas:

First, identify your successors. Make an honest assessment. Succession specialists advise business owners to put their possible successors through rigorous outside analysis if possible.

Second, prepare the new successor or boss. If a child or other relative expresses interest in taking over the family business, the owner should set up a formal system of hurdles to make sure the child gets the skills required of any other prospective manager.

Third, deal with crucial employees. One idea given by the article is that to ensure that a new leader does not lose top lieutenants, it can be wise to offer them a percentage of the business. Businesses can be severely harmed when a top employee leaves or a salesperson takes his clients elsewhere.

Fourth, cover your tax exposure by obtaining good estate and tax planning advice.

Although the article covers many of the common issues, it does not even touch upon many of the strictly estate related issues which arise such as how to be fair to children who are not party of the family business and whether or not to take affirmative steps to protect the "inherited" family business from the creditors of children and grandchildren (including for example divorce).

The real challenge here is there is not one right answer. Some children may naturally thrive in the family business and help it grow. Should they not get a larger share of the business than a sibling who had no interest in it? Then some businesses require the children to have a professional license (law, medicine, architecture, etc.) to become a shareholder in the business.

The article deals with if you want your business to continue -- it says these are the things you ought to do. Most family businesses are sold not because they cannot be continued not because they cannot be continued but because the children/heirs do not want to continue and want the cash. That is a different issue that should also be addressed in the planning stages. Each business and family is unique and it is important to have a plan that is tailored to yours.

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation. The firm is located at 2233 Huntington Drive #17, San Marino, CA 91108. He is a very experienced Los Angeles estate planning attorney, Los Angeles trust attorney and Los Angeles tax attorney who has more than 20 years' experience in business succession issues in estate planning.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

WSJ Article "Transferring Wealth Via The Bank of Mom & Dad" - Low Interest Rate Loans Via SCINs, GRATs & IDGTs

The October 3, 2009 Wall Street Journal had an article entitled "Transferring Wealth Via the Bank of Mom & Dad." The article addresses in detail some sophisticated estate planning tools (SCINs, GRATs and IDGTs) that are used by closely held family business companies and those who want to transfer more wealth to their heirs tax-free. The article addresses how falling interest rates can be used to transfer more wealth to family members tax-free via intra-family loans and transactions.

A copy of the article can be found at: http://online.wsj.com/article/SB125452042817860431.html

The article gives an example regarding the applicable federal rates in October 2009. Under the rates set monthly by the IRS, you can make a nine-year fixed-rate loan to your child for as low as 2.63%. This allows the child to borrow at a very low rate. In addition, you and your spouse could forgive up to $52,000 of the loan annually ($26,000 if the child is single), reducing their future estate tax liability without triggering current gift taxes. There are numerous rules regarding written agreements, collection of payments and the loan itself that need to be followed so the IRS does not accuse you of planning it as a gift all along.

There are three tools discussed in the article. A Self-Canceling Installment Note (SCIN) is a technique used to sell an asset, usually shares or partnership interests in a closely held family business, in exchange for an interest-bearing promissory note. An appropriately structured SCIN will remove the future appreciation in the family business from the seller’s estate. In addition, if the seller dies prior to the maturity of the promissory note, the then-outstanding principal amount of the note may be excluded from the seller’s gross estate. The article makes a SCIN look simpler than it is and there are numerous requirements that must be met in order for the IRS to respect the validity of the cancellation provision.

A Grantor-Retained Annuity Trust (GRAT) may enable you to transfer future appreciation on an asset to your heirs. If you outlive the term of the trust, most commonly two or three years, then a portion of the gain on the assets will move to your heirs free of gift or estate tax. If you die before the term of the trust expires, however, the assets revert to your estate and are taxable.

An Intentionally Defective Grantor Trust (IDGT) involves making a partial gift to a trust, which then purchases the rest of the asset in installments. IDGTs (sometimes pronounced "idjits") are sometimes preferred to GRATs, because IDGTs move an asset out of your estate immediately. There are advantages and disadvantages of the IDGT technique which are not addressed in the WSJ article.

The costs and benefits of a SCIN, GRAT or an IDGT must be carefully evaluated on a case-by-case basis. In appropriate circumstances, these tools provide families and family business owners with valuable estate planning tools to transfer the business or wealth to the next generation.

As with any sophisticated estate planning: do not try this at home or try to do it yourself. These tools demand the expertise of a trust attorney who specializes in estate planning.

The firm website is http://www.moravecslaw.com/. The firm is located at 2233 Huntington Drive #17, San Marino, CA 91108. There is ample free parking adjacent to the firm's office.

Posted by Henry (Hank) Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or contact Hank (626) 793-3210 for a complimentary consultation about your own situation. The firm website is http://www.moravecslaw.com/

The firm is a boutique estates and trust law practice specializing only in Estate Planning, Probate, Trust Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law.

The office is located in San Marino, California, a suburb of Los Angeles in the San Gabriel area located 20 minutes from downtown Los Angeles. The firm represents clients throughout California and its attorneys appears in probate court throughout Southern California (Pasadena estate planning attorney, Los Angeles estate planning attorney, Santa Monica estate planning attorney, Pomona estate planning attorney, Torrance estate planning attorney, Long Beach estate planning attorney, Van Nuys estate planning attorney, Santa Barbara estate planning attorney, Orange County estate planning attorney, Riverside estate planning attorney, San Bernardino estate planning attorney).

As A Business Owner, What Do I Need To Consider When Planning My Estate?

Many business owners have a well thought out business plan as it relates to operating their business, but neglect to plan for contingencies such as death or loss of competence.

When an individual owns a business, estate planning requires a more sophisticated look at the entire picture. The initial focus is on the underlying documents of ownership (do they accurately reflect the ownership interest) and the form in which the business is held (corporation, LLC, partnership, etc.). For example, two of the issues we analyze -- among many others -- are:

■ Is the business held in the best possible way to reduce the imposition of estate taxes?

■ Should minority ownership interests be gifted to family members during the business owner’s lifetime in an effort to reduce the estate tax bite upon death? Such lifetime gifts can reduce the value of the business for estate tax purposes by up to 35 percent.

There are a vast array of issues that are factually specific to your situation and your needs. One size plan will not fit all. For example, many couples have premarital and post-marital agreements, which require specific distributions upon death. As estate and trust attorneys, we ensure that the terms of your Trust effectively reflects the terms of these contractual agreements.

On the other hand, if you are one of the very few that have a contingency plan, ask yourself the following questions:

■ Has it been updated since the Tax Reform Act of 2001?

■ Have you taken advantage of new estate planning vehicles that may
significantly reduce estate taxes for your family?

■ Has your family situation changed? Have you remarried or divorced or had more children?

■ More importantly, was your existing plan properly drafted?

Just as we have health checks, our estate plans should be revisited periodically.

For a detailed article on "Estate Planning For The Business Owner," go to the following link from our website:

http://www.moravecslaw.com/yahoo_site_admin/assets/docs/second_flyer.74122946.pdf

Even though none of us like to think about the fact that we will not live forever and that when we die the taxman will always be standing at the head of the line -- this is a fact of life. In addition, family disputes and probate litigation arise more often when estates are not well-planned.

If you want to ensure that your family is properly cared for and that all the facets of your business, its succession and its impact on your estate plan are well-planned, you should address these issues sooner rather than later. It is common to put these type of projects off and we are skilled at helping our business owner clients begin and go through the estate planning process whether there is a small family business or there are numerous corporations, real estate holdings and limited partnerships involved.

Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/

Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation, in San Marino, California. He focuses his practice on Estate Planning, Trust and Probate Administration, Probate Litigation, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his office is conveniently located for clients in the Los Angeles, Orange and San Bernardino Counties.