CONEXPO-CON/AGG 2014

Transcription

1 CONEXPO-CON/AGG 2014 Las Vegas Convention Center Las Vegas, NV, USA March 4-8,

2 Preserve and Transition Your Company and Wealth 2 2

3 1. Nationally Recognized Estate Planning, Business Succession and Life Insurance Planning Firm 2. Speakers and advisors to CONEXPO-CON/AGG and many Associations and business owners throughout the country 3. Written and been interviewed in articles for a large number of publications, including The Wall Street Journal and Nation s Business 4. Featured in book Streetwise Marketing Plan 3 3

4 Two Vital Questions.. 1. Are you working the majority of your lifetime to build your business only to eventually lose it? 2. Are you putting your family in the eventual position of no longer being on speaking terms? This is as Real as Real Can Get! 4 4

5 The Leading Cause of Business Failure. 5 5

6 INEFFECTIVE SUCCESSION/ESTATE PLANNING 6 6

7 What is Succession Planning? A Deliberate and Systematic Effort by an Organization to Ensure Leadership/Ownership Continuity 7 7

8 What is Estate Planning? The Effective Preservation and Transition of Personal and Business Wealth 8 8

9 Many Business Owners Harm Their Families Inactive Spouse Receives Business 9 9

10 Many Business Owners Harm Their Children Next Generation is Transitioned a Financially Weakened Business 10 10

11 23.3 Million U.S. Businesses 10% Public/90% Private 11 11

12 2 OUT OF EVERY 3 FAMILY BUSINESSES WILL NOT MAKE IT FROM THE FOUNDER TO THE 2 ND GENERATION! Original Owner Can t Let Go Lack of Plan / Inadequate Planning Next Generation Not Sufficiently Prepared 12 12

13 IMPORTANCE OF SEPARATING COMPANY FROM FAMILY Challenge for Parents: COMMUNICATION Family Meetings 13 13

14 10 POINT BUSINESS SUCCESSION PLANNING CHECKLIST Have These Issues Been Addressed? 14 14

15 Issue #1 Define Personal Goals and Vision for the Transfer of Ownership and Management 15 15

16 Issue #2 Identify Your Successor If you are a Family Business, is a Family Member the best choice to take over? Typically the answer is Yes, but it should not be automatic the business must be run as a business first! 16 16

17 Issue #3 Importance of Family Involvement in the Company s Future 17 17

18 Issue #4 Techniques to Reduce or Eliminate Estate Taxes 18 18

19 Issue #5 Sufficient Liquidity Positioning to Avoid the Forced Sale of the Company and Provide for Estate Equalization 19 19

20 Issue #6 Buy-Sell Agreements A. Stock Redemption B. Cross Purchase 20 20

21 Issue #7 Disability Contingency Plan 21 21

22 Issue #8 Stock-Transfer Techniques to Achieve Succession Goals 22 22

23 Issue #9 Business Dependency to Meet Retirement Cash Flow Needs 23 23

24 Issue #10 Business Valuation Is Succession to Family or Outsiders? 24 24

25 Leading Causes for Unsuccessful Succession No Succession Plan in Place Ineffective/Outdated Plan Inability to Retain Key Execs after owner exits the business Disastrous Personal Estate Plan Company left to Inactive Spouse and/or family members 25 25

26 American Taxpayer Relief Act

27 An Inside Look Exemption Amount Increased to $5m/individual and $10m/married couple (during life, death or combination).indexed for inflation Tax Rate 40% Permanent?? As the saying goes A law is only permanent until Congress decides to change it 27 27

28 FACT PRIVATELY OWNED BUSINESSES STILL AT RISK 28 28

29 What does this mean for CONEXPO-CON/AGG attendees? Failure to address today s issues with proper estate, business succession and insurance planning will result in avoidable and costly mistakes! 29 29

30 Acquiring Assets Planning For Estate 30 30

31 Most Common Mistakes Complacency Unrecognized Estate Size and Tax Hit Poor Liquidity Position Improperly Arranged Life Insurance Lack of a Master Game Plan 31 31

32 Types of Trusts Revocable - Grantor CAN change or terminate the Trust Irrevocable Grantor CANNOT change or terminate the Trust 32 32

33 Revocable or Irrevocable Trust? Depends on the Planning Purpose 33 33

34 Estate Planning Assets Both business and non business Assets go to whom you want, when you want, and how you want Current Plan Are you 100% certain this will happen? Statistically speaking.the answer is NO 34 34

35 Ownership of Assets How You Own What You Own Decides How You Pass What You Pass 35 35

36 Property in Your Gross Estate Cash Real Estate Personal Property Retirement Plans Business Interests Investments Tangible Assets Revocable Trusts Annuities Life Insurance 36 36

37 Annual Exclusion Gifts of up to $14,000/year Present Interest No Tax, No Paperwork Joint Gift; $28,000/year 37 37

38 Significant Gift and Estate Tax Reductions Created through utilization of annual gifting AND $5,000,000 + Exemption Amount 38 38

39 Unlimited Marital Deduction Dollar for Dollar Deduction on Assets Transferred to a Spouse Outright, Unconditional Transfer or Qualifying Trust (GPA or Q-Tip) included in Spouse s estate at death 39 39

40 With No Estate Plan State Law Determines Who Receives Your Assets State Law Fixes the Timing and Terms. Children may have unrestricted control of large sums of money. The court appoints administrators whose ideas may differ from yours 40 40

41 Advanced Planning Grantor Retained Annuity Trust Intentionally Defective Grantor Trust Private Annuity Sales Self Cancelling Installment Notes 41 41

42 Liquidity Needs In Estate and Business Succession Planning Administration Expenses 2-5% of Gross Estate Federal Estate Taxes (due within 9 months) often Deferred to Second Death Business Capital Buy/Sell Planning Family Income Needs Estate Equalization 42 42

43 Reality for Most Business Owners Liquid Position Cash Life Insurance C.D. s Liquid Stocks Bonds Annuities Semi Liquid Corporation/LLC Real Estate Residence(s) Illiquid 43 43

44 ESTATE TAX PAYMENT OPTION Cash (Self Funding) Reduces Amount Family Receives Reduces Funds Family May Need for Current and Future Expenses Capital to run Company is Gone Lost Profit Opportunities 44 44

45 ESTATE TAX PAYMENT OPTION Sale of Illiquid Assets (Typically the Worst Option) Unlikely to Receive Fair Value Family Receives Neither the Family Business/Property Nor Its Value IRS Receives the Cash Family Business or Property is Eliminated 45 45

46 ESTATE TAX PAYMENT OPTION Life Insurance The least expensive method to pay estate taxes Death Benefit May Be Income/Estate Tax Free Preserves Assets - including the Business Maintains Family Harmony 46 46

47 Irrevocable Trust/LLC with Life Insurance Preserves entire estate Pay Taxes and Administration costs in the most cost efficient manner Maintain Family Harmony 47 47

48 Policy Types Available Term Universal Variable Variable Universal No Lapse Universal Indexed Universal Whole Life Whole Life / Term Blend Individual or Second to Die 48 48

49 Misunderstanding = SUBSTANIAL Problems 49 49

50 Substantial Problems: Loss of All Money Paid Loss of Cash Value Loss of Death Benefit Taxable Death Benefit 50 50

51 DO YOU HAVE? Variable - Warning Universal - Warning Variable Universal Warning No Lapse Universal - Potential Warning 51 51

52 IT IS FINANCIALLY CRITICAL TO UNDERSTAND 1. THE CONTRACTUAL LANGUAGE IN YOUR POLICIES 2. The Design of Your Policies 3. The Ownership of Your Polices 52 52

53 Life Insurance is an ASSET The second largest ASSET for most business owners Most business owners do not have a thorough understanding of how their insurance contracts function - this often leads to significant problems for their Estate and Succession Plans 53 53

54 The Objective of An Insurance Premium Payment TRANSFER A RISK - BUT IS THIS GUARANTEED TO HAPPEN?? IT DEPENDS

55 Variable Life Universal Life Variable Universal Life The following items are NOT Guaranteed 1. Premium 2. Cash Value 3. Death Benefit 55 55

56 Company Safety is Critical Verify Ratings by all 5 Major Independent Rating Services Comdex Score Any recent downgrades of company 56 56

57 Questions that MUST have Correct Answers Was your life insurance acquisition based upon strict due diligence? Do you know the Comdex Score of your insurance company(s)...have you ever heard of a Comdex Score? Are you certain, with all the changes in the market place, that you have policies with the lowest net cost? 57 57

58 I thought Life Insurance was Tax Free Income and Estate Tax Situations Ownership of Policy must be set up correctly Pension Protection Act of 2006!! Three Party Contracts 58 58

59 Valuation Important for Lifetime Gifts and Testamentary Transfers Fair Market Value What a Willing Buyer Would Pay a Willing Seller, Neither Being under a Compulsion to Buy or Sell and Both Knowing All Relevant Factors 59 59

60 Valuation IRS Revenue Rulings Key Ruling Earnings Capacity Book Value Dividend Capacity Marketability Risk Closely Held Market Factor Publicly Held Minority Discounts Control Premium 60 60

61 Business or Surviving Shareholder Required Financial Obligation $ 5 MILLION BUYOUT AMOUNT 61 61

62 What are the Choices to Fund a Buyout? Sinking Fund Borrowing Installment Method Life Insurance 62 62

63 What are the Costs for each method? SINKING FUND - $5,000,000 BORROWING - More than $5,000,000 INSTALLMENTS - More than $5,000,000 LIFE INSURANCE - Significantly Less Than $5,000,

64 Case Study F&F, Inc. Frank and Fred are equal owners of F&F, Inc. a profitable S Corporation F&F, Inc. valued at $10,000,000 Buy-Sell Agreement REQUIRES surviving owner to purchase deceased owner s interest for $5,000,000 under an installment contract payable over 10 years PLUS interest 64 64

65 Installment Method Overview Installment payments are NOT deductible by F&F, Inc. Frank and Fred are individually in a 40% marginal federal and state tax bracket F&F, Inc. operates on profit margin of 10% for every dollar of sale 65 65

66 Installment Method Financial Reality Annual Installment Payment is $500,000 (not including interest) Surviving Owner has to earn nearly $850,000 in income to net $500,000 in a 40% marginal federal and state tax bracket To earn $850,000, the surviving owner has to generate annual sales of $8,500,000, which is $85,000,000 over the ten year installment period! 66 66

67 Installment Method Issues Could either surviving owner generate enough profit to pay the installment obligation AND still earn a good income for his personal needs? Will the death of an owner have a negative impact on sales? How is that going to be made up? 67 67

68 Installment Method Issues (Continued) Will the survivor have to hire someone to take over the responsibilities of the deceased owner? Where is the cash flow coming for this? How much more is needed? Will the installment obligation effect the ability of the Company to pay salaries, borrow money, expand or fulfill other business purposes? 68 68

69 What Happens.. To existing company debt when one owner is deceased or out of the business because of a disability? If the company or surviving owner becomes insolvent during the installment period? If the surviving owner dies or becomes disabled during the installment period? 69 69

70 Buy-Sell Agreements A Legal Document that Provides for the Terms for the Future Sale of a Business Interest 70 70

71 Advantages of a Formal Buy-Sell Agreement Surviving Owner maintains Continuity of Ownership and Management Decedent s Estate / Family Converts Unmarketable, Non-Liquid Business Interest to Cash Provide Fair and Reasonable Price Possibly Peg the Value for Federal Estate Tax Purposes 71 71

72 Types of Buy-Sell Agreements Stock Redemption Cross Purchase 72 72

73 Key Components Buy-Sell Agreement Language that addresses all contingencies Valuation Funding 73 73

74 Stock Redemption Plan A and B Form Corporation & Each Contributes $500, Years Later Corporation is Worth $10,000,000 A and B Enter Into a Stock Redemption Agreement Corporation Becomes Owner and Beneficiary of $5,000,000 Policy on Both A and B 74 74

75 Stock Redemption Plan A Dies: $5,000,000 Death Benefit is Paid to the Corporation Corporation pays $5,000,000 to A s Estate A s Estate Redeems Stock Back to Corporation B s Stock is Now Worth $10,000,000 (Same # Shares, Twice the Value) 75 75

76 Stock Redemption Plan B Decides to Retire and Sell Corporation for $10,000,000 B Must Pay Capital Gains taxes on $9,500,000 ($10,000,000 Minus Original Cost Basis of $500,000) 76 76

77 Cross Purchase Plan A and B Form Corporation & Each Contributes $500, Years Later Corporation is Worth $10,000,000 A and B Enter Into Cross Purchase Plan 77 77

78 Cross Purchase Plan A is Owner and Beneficiary of $5,000,000 Policy on B B is Owner and Beneficiary of $5,000,000 Policy on A 78 78

79 Cross Purchase Plan A Dies: B is Paid $5,000,000 from Policy on A s Life B Pays A s Estate $5,000,000 for A s Stock B now Owns $10,000,000 of Company Stock 79 79

80 Cross Purchase Plan B Decides to Retire and Sell Corporation for $10,000,000 Since B bought A s Stock for $5,000,000 and had $500,000 Original Basis B Pays Capital Gains Taxes on $4,500,000 RESULT. Tax Savings on $5,000,

81 Summary Buy/Sell Agreements are more than a Business Planning Strategy If drafted and funded properly, they protect everyone owners and their families and employees and their families Be cognizant of design to avoid possible unnecessary taxes in the future 81 81

82 Successful Transition for A s Family and B Right? MAYBE NOT! 82 82

83 WHY??? As is True with Most Existing Business Succession Plans it was Never Updated! 83 83

84 What s Changed?..Plenty! A and B each had a child working in the business for years and A and B both want their child to have future ownership 84 84

85 Let s Talk about A s Child s Ownership Future Not a Very Long Discussion! 85 85

86 How to Avoid These Types of Problems Do NOT become complacent with your planning Make certain you work with specialists If your advisors have not reviewed your planning recently, especially if there have been changes, it s time to look elsewhere..it is your family and business that suffers not the advisors! 86 86

87 SPECIAL CASE STUDY ABC, INC. SUCCESSION PLAN 87 87

88 Case Facts Louie and Louise Young, Ages 63 and 61 Three Children: Joe, Age 31 and Unmarried Moe, Age 28 and Married to Nora Helena, Age 25 and Married to Ken Louie, Louise, Joe and Moe each own 25% Fair Market Value of ABC, Inc. is $7,000,000 Louie and Louise Estate Valued at $10,000,

89 Current Plan Louie and Louise have Simple Wills At Second Death, Estate is Distributed Equally among the Three Children There is no Buy-Sell Agreement Moe and Helena have Simple Wills Joe does not have a Will 89 89

90 Goals Distribute the Estate Fairly Upon the Last to Die of Louie and Louise Assure that ABC, Inc. is Run by the two sons, Joe and Moe, who are Active in the Business Helena to receive Non-Business assets 90 90

91 Results of Current Plan after Death Joe 42 Shares $500,000 Moe 42 Shares $500,000 Louie 25 Shares Louise 25 Shares Helena 16 Shares $500,

92 Results of Current Plan At Moe s Subsequent Death Joe 42 Shares Moe Nora 42 Shares Helena 16 Shares 92 92

93 Possible Results of Current Plan at Moe s Subsequent Death Nora and Helena Can Sell ABC, Inc. to Strangers/Competitors Joe Lost Control of ABC, Inc. Who is Running ABC, Inc.? 93 93

94 Solutions/Step-One Assets Transfer to Survivor at first death Louie Louise Brothers Purchase Shares at Second Death Cross Purchase Joe Moe 94 94

95 Solutions/Step Two After Sons Buy Shares, Estate Has $3,500,000 in Newly Created Liquid Assets Parents now Have the Ability to Increase Cash Distribution to Helena 95 95

96 New Plan Results Louie Louise Purchased Shares at Second Death Cross Purchase Joe Moe 96 96

97 End Result Joe $2,000, Shares Moe $2,000, Shares Helena $3,000,

98 CONTACT INFORMATION Leon B. Resnick Grant Street Overland Park, KS (913) office / (816) cell Terrance K. Resnick 2073 Doral Drive Harrisburg, PA (717) office / (717) cell 98 98

99 Follow-Up Complete and turn in questionnaire for individualized additional information 30 Minute Complimentary Consultations today 30 Minute Complimentary Telephone Consultations for anyone unable to meet in person 99 99