Planning After ATRA: The CPA s Guide to Financial and Estate Planning Business Succession Planning. Presented by: Steven G.

Transcription

1 Planning After ATRA: The CPA s Guide to Financial and Estate Planning Business Succession Planning Presented by: Steven G. Siegel, JD, LLM 1

2 Introduction About the PFP Section & PFS Credential The AICPA PFP Section provides information, resources, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and their closely held entities The CPA/Personal Financial Specialist (PFS) credential distinguishes CPAs as subject-matter experts who have demonstrated their financial planning knowledge through experience, education and testing 2

3 Introduction Steve G. Siegel, JD, LLM The Siegel Group 3

4 Agenda Intrafamily business transfers Giving the business to family members Entering into a buy-sell agreement Selling the business to third parties Special considerations 4

5 Intrafamily Business Transfers People, Property, Process, Pitfalls and Plaintiffs Key Elements in the Planning Process Some Realities of Family Business Succession 5

6 Give the Business to Family Members Recognize the Difficulties of Transferring a Family Business Through Multiple Generations Is There a Succession Plan? Has the Business Owner Diversified His or Her Assets? Address the Value of the Business Fair market value of a closely-held business is the price that a willing buyer and a willing seller would agree upon. Appraisals by independent, certified third parties are highly recommended. Book value is not an acceptable measure of the value of a business. Consider valuation discounts: minority interest, lack of marketability, built-in capital gain Family control is disregarded in applying minority interest discount for lack of control. Defined value gift may be used to lock in a value without committing to a number of shares, units, etc. being transferred. Recognize that valuation is one of, if not the prime audit topic when a closelyheld business is transferred. 6

7 Give the Business to Family Members Address the Federal Gift Tax Rules Marital deduction Annual gift tax exclusion of present interests in property Lifetime gifting exemption Income tax basis rules Be Aware of the Code Section 2036(b) Trap - The retention of voting rights in a controlled corporation (defined as the right to vote at least 20 percent of the stock) is considered a retained interest in the enjoyment of the transferred property. 7

8 Give the Business to Family Members If the Owner Dies Owning the Business, Address Liquidity Issues Code Section 303 Redemptions to Pay Death Taxes Code Section 6166 Installment Payments Planning Consideration: Be wary of an unintended dilution of the family business interest. If the family owns 100% of a business interest, this will not be a problem. However, if two families, for example, each own 50% of the stock of the business, any redemption of voting stock from one family will create a loss of control situation for the redeeming family. 8

9 Give the Business to Family Members Consider advanced estate planning techniques to freeze the value of the business and/or transfer it to the next generation Self-Canceling Installment Note (SCIN) Private Annuity Grantor Retained Interest Trusts (GRATs) Installment Sales to Intentionally Defective Grantor Trusts (IDGTs) The Charitable Bail-Out: Transfer the Family Business Interest and Receive a Tax Deduction Family Partnerships and LLCs as Family Transfer Vehicles Multi - Generation-Skipping Transfer Tax Planning: Using Dynasty Trusts Issue: ATRA made the estate tax exemption $5 million per person, indexed for inflation since 2010 with a 40% tax rate on the excess value in a person s estate. The portability of the deceased spouse s unused exemption amount has been made permanent. 9

10 Enter Into a Buy-Sell Agreement Considerations for Buyers and Sellers in Buy-Sell Agreements for Closely-Held Businesses Objectives of a Buy-Sell Agreement For the Deceased Owner s Estate For the Retired or Disabled Owner For the Remaining Owners Types of Buy-Sell Agreements Cross-purchase Entity buy-out Hybrid agreement 10

11 Enter Into a Buy-Sell Agreement Choosing the Right Type of Agreement Number of Owners Premium Payments on Life Insurance Policies Transfer for Value Problems Alternative Minimum Tax Problems Accumulated Earnings Tax Basis for Income Tax Purposes Suggested Terms of a Buy-Sell Agreement Triggering Events Setting the Purchase Price Payment Terms Should the Buy-Sell Be Mandatory or Optional? Restrictions 11

12 Sell the Business to Third Parties Form of the Transaction As a general rule, sellers prefer to sell stock, while buyers prefer to acquire assets. Tax Classifications of Business Acquisitions Taxable asset acquisitions Taxable stock acquisitions Taxable Asset Acquisitions: Allocation of the Purchase Price Among the Acquired Assets 12

13 Sell the Business to Third Parties Code Section 1060: Specific Rules for Allocation of the Purchase Price - Taxable Asset Acquisitions Residual method of allocation: purchase price is allocated in accordance with a specified system of priorities, first to identifiable tangible and intangible assets acquired, up to the amount of the fair market value of such assets. Any remaining consideration (the residual amount) is then allocated to goodwill. Residual method s system of priorities creates seven categories of asset classes Rules of Code Section 1060 still leave a great deal of room for disputing purchase price allocations with the Internal Revenue Service 13

14 Special Considerations Involving S Corporation Acquisitions Eligibility Issues 100 shareholder limit Limitations on permitted shareholders Single class of stock Debt vs. Equity Issues When debt is involved in an acquisition involving an S corporation, concern must be raised that the debt will not be reclassified as an equity interest and lead to a violation of the single class of stock requirement. Built-In Gains Tax Issues 14

15 Special Considerations Involving Acquisitions of Partnership Interests General rules: capital gain and ordinary income As a general rule, the sale of a partnership interest (or an interest in a limited liability company, since it is taxed as a partnership) represents the sale of a capital asset. Capital asset treatment will not apply to the extent the sale proceeds are attributable to Section 751 assets of the partnership. - Inventory - Unrealized receivables When a partnership interest is sold, the selling price is allocated among the partnership assets as divided into Section 751 assets and non-section 751 assets based upon the relative fair market values of each category 15

16 Special Considerations Involving Acquisitions of Partnership Interests General rules: Basis of Acquiring Partner s Interest The purchaser of a partnership interest acquires a cost basis in that interest. This is sometimes called a partner s outside basis. The purchaser s basis in the assets of the partnership itself is not equal to the cost of the partnership interest. The acquiring partner s share of this basis (sometimes called the inside basis ) is not affected by the acquisition of a partnership interest. This failure to receive a basis adjustment can be remedied by having the partnership make a Section 754 election. The effect of this election will be to have a basis adjustment in the partnership property apply with respect to (only) the incoming partner. When the Section 754 election is made, the basis of the overall partnership assets does not change. The basis adjustment is allocated proportionately between the categories of assets to reduce the difference between FMV and basis. 16

17 Questions? 17

18 PFP Section Resources (aicpa.org/pfp) The CPA s Guide to Financial & Estate Planning Volumes 1-4 Planning After ATRA and the Net Investment Income Tax Toolkit: aicpa.org/pfp/proactiveplanning More resources on estate, tax, retirement, insurance, and investments (aicpa.org/pfp) Forefield Advisor (aicpa.org/pfp/forefield) Client education and communication tool Written by CPAs, attorneys and other subject matter experts. More than 3,000 resources covering personal financial planning, including estate, tax, retirement, investment and risk management planning. Keyword search: American Taxpayer Relief Act AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/pfp) January 20-22, 2014 in Las Vegas 2-day session (Jan 18-19) for those in earlier stages of PFP o Implementing PFP Services: Step by Step Plans for Success For the full calendar of upcoming PFP Section events, visit and click on CPE & Events. 18

19 Upcoming PFP Section Web seminars Register now for these events: More from this series: - Essential Estate Planning Considerations* - Portability A Planning Game-Changer But Not as Simple as It Appears* - Business Succession Planning After the American Tax Relief Act of 2012* - Taxation of Divorce (November 21, 1:00-2:45p.m. ET) Top Estate and Income Tax Planning Strategies (November 11, 1:00-2:45p.m. ET) Investment Tax Planning Creating Tax Alpha (November 12, 1:00-2:45p.m. ET) PFP Power Hour: How to Use Forefield Advisor in Your PFP Practice (November 14, 3:00-4:00p.m. ET) Trust Situs for Dynasty Trusts & DAPTs (November 15, 1:00-2:45p.m. ET) For the full calendar of upcoming PFP Section events, visit aicpa.org/pfp and click on CPE & Events. *To access the archives, visit aicpa.org/pfp/webseminars. 19

20 CPA/PFS News and Events PFS Referral Program Receive 100% credit to apply toward future CPA/PFS dues by referring a CPA to become a PFS or sit for the PFS exam PFS Exam Registration open for winter window Discounts, sponsorships and volume pricing available Education Opportunities Live 2 ½ day review class 3 locations in Oct/Nov: OH, AZ, GA In-depth courses in estate, retirement, tax, investments, insurance, and PFP process Self-study PFS exam review course Learn more at aicpa.org/pfp/pfs 20