A Perfect Storm. Succession Planning Strategies for Construction & Real Estate Companies in a Down Economy

Transcription

1 A Perfect Strm Successin Planning Strategies fr Cnstructin & Real Estate Cmpanies in a Dwn Ecnmy

2 A Perfect Strm Cnstructin revenues have declined & s have real estate values

3 A Perfect Strm Headlines Real Estate Accrding t Natinal Real Estate Investr magazine s 2010 survey, the uncertainty and fear that gripped the cmmercial real estate investment market in 2009 and led t a sharp drp in prperty sales and develpment activity is strngly reflected in the survey Cnstructin Brkerage faced with lwer vlume in leasing and sales transactins, majr brkerage firms have struggled t maintain Office Develpers It has been a tugh tw years fr wners f the natin s ffice prperties Industrial Develpers The U.S. industrial market is expecting a slw, sustained recvery Prperty Managers As prperty firms try t retain tenants, declining cmmercial real estate values and disappinting rental rates are cmpelling them Lenders Lenders may nt have cme ut and said that they really didn t want t d the deal, but all f a sudden lan terms wuld change Apartment Managers After tw years f rising vacancies and slumping rents... Shpping Center Owners A year ag, Manhattan real estate brkers faced a grim retail market Htel Owners The wrst is past Value f cnstructin spending, indicatr f health f cnstructin market, fell 2 percent in first eight mnths f 2011, cmpared t same perid in 2010.

4 The Strm is Clearing Accrding t Natinal Real Estate Investr magazine s 2011 survey while nly a smattering f cmmercial real estate develpment is taking place acrss the cuntry, transactin activity is n the rise due t imprving real estate fundamentals and pent up investr demand. Brkerage leasing and investment sales transactins cntinue t recver Office Develpers Cmmercial real estate bservers have cheered the ffice sectr s slw but sustained recvery ver the last few quarters Industrial Develpers Althugh the industrial market is bracing fr a slw recvery, the surge in demand fr space in recent mnths is lifting spirits and ccupancies Prperty Managers Thirty mnths after the fficial end f the Great Recessin, prperty managers are jstling fr a flurry f new assignments amid reviving cmmercial real estate Lenders Lenders increase financing vlume, but nly fr lw risk prperties Apartment Managers Apartment vacancies are dramatically dwn this year while rents are rising up by duble digit percentages in sme markets Shpping Center Owners Landlrd cncessins are shwing signs f tapering ff, while prperty sales crank up Htel Owners Bth sides f the ldging industry are heating up. U.S. htel demand cntinues t climb and rates are slwly rising

5 Silver Lining in the Cluds Frm business successin standpint, these trends can be gd things Why? Primary business valuatin methds are

6 Incme Apprach Value is present value f future ecnmic benefits t be received by wner Single perid apprach capitalizatin f earnings Multi perid apprach discunted future earnings

7 Market Apprach Value f business is determined by lking t market fr valuatin & pricing metrics Guideline public cmpanies Cmparable private transactins Prir transactins

8 Asset Apprach Value f cmpany is cmprised f value f its underlying assets Assumes buyer wuld nt pay mre fr cmpany than value f tangible assets What wuld it cst t recreate assets?

9 A Perfect Strm Nt nly are valuatin methdlgies being impacted by current ecnmic envirnment, but s are key valuatin assumptins Discunt rates (used in incme appraches) Intended t reflect risk inherent in benefit stream Discunt fr lack f cntrl Inability f nn cntrlling wner t make changes t increase earnings (& value) Discunt fr lack f marketability/liquidity Inability t quickly cnvert investment t cash

10 A Perfect Strm Frm valuatin perspective, macr ecnmic & evaluatin trends have pushed cmpany valuatins DOWN May make this ideal time t transfer business interests

11 Umbrellas & Raincats Advantageus estate & gift tax laws Optimal ecnmy fr lw values Valuatin discunts still available t family businesses Effective strategies t transfer wealth & implement successin plans

12 Estate Tax Exemptin Tday Tax Relief, Unemplyment Insurance Authrizatin & Jb Creatin Act f 2010 passed 12/17/10 Beginning 1/1/2011, Estate, Gift & Generatin Skipping Tax Exemptin is $5.0 millin per taxpayer & tax rate is 35% beginning in 2010 Allwing prtability f unused lifetime exemptin by last deceased spuse Lifetime gift exemptin increases frm $1.0 mil t $5.0 mil unifying gift & estate tax exemptin

13 Tp Estate & Gift Tax Rates

14 Hw Des it Wrk?

15 Hw Des it Wrk? Gift Tax Annual Exclusin $13,000 per persn, per dnr Withut gift tax impsitin Lifetime Exemptin >$13,000 per persn, per dnr Reduces $5.0 millin available t gift per dnr Taxable Gift >$5.0 millin per dnr Subject t 35% tax f FMV

16 Hw Des it Wrk? Generatin Skipping Transfer Tax Transfers (during life &/r death) t skip persns subject t additinal tax f 55% Skip persns = persns at least tw generatins belw that f transferr Parent Child Grandchild Skip Persn

17 Strategies Nn Vting Interests Family Limited Partnerships Grantr Retained Annuity Trusts Sales t Defective Trusts

18 Nn Vting Interests S crpratin limitatins f ne class f stck still allw nnvting & vting interests Valuatin discunts related t lack f cntrl & marketability

19 Family Limited Partnerships Cntributrs Owners Limited Partners Next Generatin General Partner 1% GP Interest Limited Partnership

20 Family Limited Partnerships Basics Family limited partnership (FLP) is entity created under state law in which the nly partners are family members r family trusts. Nrmally, entities cntrlled by parents are general partners & children r grandchildren (r trusts) are limited partners. General partners, with as little as 1 % interest, have cmplete cntrl ver family assets, yet bulk f taxable value can be transferred t children r ther family members. This vehicle has becme very ppular in recent years because f certain advantages inherent with such entities, which make FLP a pwerful vehicle

21 Family Limited Partnerships Asset Prtectin Layers f Prtectin Individual family members n lnger have legal title r equitable title t assets wned by FLP. Transfers made fr legitimate business & estate planning purpses typically are perceived as lawful Creditrs Rights Withut cnsent f all partners & prvisin in certificate f limited partnership, partner can transfer nly his r her share in prfits. Assignees d nt becme limited partners & may nt exercise any rights as partners Charging Order Generally, charging rder prvides nly means by which creditr f partner can reach partnership interest f debtr partner. Charging rder entitles creditr t receive debtr partner s share f prfits & distributins but des nt allw creditr t reach assets f partnership, nr becme partner. Even with charging rder in effect, general partner remains in cntrl f FLP & cntinues t make decisins regarding management f FLP s assets. The creditr receives funds nly frm distributins & cannt demand such distributins. Thus, creditr may have t pay incme taxes n their share f partnership prfits withut actually receiving any cash distributins

22 Family Limited Partnerships Taxatin Cnsideratins Taxed as Partnership FLP des nt pay taxes n incme; hwever, each partner reprts his r her share f partnership incme r lss. Generally, partners wh cntribute prperty t FLP recgnize n gain r lss N Gain n Appreciated Prperty FLP des nt recgnize gain when it distributes appreciated assets t cntributing partner Cash Distributins nt Taxable Generally, cash distributins t partner d nt create taxable incme; cnversely, partner must reprt his share f partnership net incme whether distributed r retained in partnership

23 Family Limited Partnerships Cntrl Cnsideratins Tailred Prvisins Individualized, specially tailred prvisins f FLP agreement can (1) limit partner s right t demand the return f any part f his r her cntributin except upn disslutin r liquidatin, (2) give general partners ability t retain prfits fr reasnable needs, (3) require high percentage f wnership interest fr vting purpses, (4) prvide that invluntary transfers (perhaps by failed marriage) be subject t buy sell agreement & (5) restrict vluntary r invluntary assignment f limited partner s interest. Such prvisins can ensure that management & cntrl f FLP remains with general partners & deters verride f partnership agreement r general partner decisins

24 Family Limited Partnerships Valuatin Discunts Recent tax curt decisins supprt lack f marketability & minrity interest discunts in determining value f partnership interest & suggest discunts f 30 t 35 percent Lack f marketability discunting arises because few buyers will pay full price fr nn cntrlling interest in entity with many limitatins & restrictins Minrity discunting arises when minrity wner can nt frce liquidatin r disslutin & lacks cntrl ver business items N aggregatin necessary IRS recently agreed nt t aggregate family member s interests when determining if certain interest supprts minrity r lack f marketability discunt Tax refrm prpsals wuld eliminate discunts in certain circumstances. This restrictin was nt included in 2010 Tax Relief Act

25 Family Limited Partnerships Gifting Benefits Reductin f Estate Taxes FLP allws parents t reduce their taxable estate thrugh planned gifting prgram by divesting themselves f limited partnership interests Facilitates Gifting FLP makes it easier t gift indivisible family assets, such as real estate. FLP als allws fr gifting cmbinatin f family assets in ne gift Retentin f Cntrl Dnr, acting as general partner, retains effective cntrl ver partnership assets Tax Free Grwth FLP allws fr appreciatin f partnership assets t ccur free f gift taxes. Value f interests in FLP des reflect such appreciatin Giving Mre fr Less Due t discunting f limited partnership interests, FLP may allw dnr t transfer assets f higher value at lwer gift tax cst

26 Example f Transfer with FLP Gift Analysis With Withut Real Estate 10,000,000 10,000,000 Valuatin Discunt 30% Discunted FMV 7,000,000 10,000,000 Gifted 50% t Heirs NOW 3,500,000 5,000,000 Gift Tax n Transfer 350,000 Additinal $2,007,500 transferred t heirs Estate Summary With FLP and Gift Persnal Real Estate 1,320,000 1,320,000 Cash & Investments 3,850,000 3,850,000 Life Insurance 5,500,000 5,500,000 Retirement 3,300,000 3,300,000 Real Estate Business 11,000,000 3,850,000 $ 24,970,000 $ 17,820,000 Estate Tax 13,937,700 11,930,200 Discunt in FLP 1,650,000 Amunts Gifted 1,100,000 6,600,000 Estate remaining fr heirs $ 12,132,300 $ 14,139,800 Assuming single dnr with 10% increase in FMV by 2016 & prir $1.0 mil gifts

27 Other Strategies GRATs (Grantr Retained Annuity Trusts) & IDGTs Effective means fr wealthy client t retain cash flw frm high yielding & rapidly appreciating prperty while transferring prperty t child with minimal gift tax r estate tax At end f term, assets in trusts, including their appreciatin, g t named remainder beneficiary Administratin prpsed changes t GRATs requiring minimum 10 year term which was nt included in 2010 Tax Relief Act Act quickly. Administratin nt likely t quit prmting these restrictins

28 Plan Befre the Strm Clears Values still depressed & recvering Rates & exemptins are temprary Apply t 2011 & 2012 nly 2013 Gift, Estate & Generatin Skipping Transfer (GST) Tax revert t previusly scheduled amunts $1.0 millin (GST indexed fr inflatin) exemptin amunts 50% & 55% estate & GST tax Tw year GRATs (Grantr Retained Annuity Trusts) are still permitted Family Limited Partnerships r LLCs Discunts t leverage value

29 Patricia Quintana-Perrn, MBA, CPA, CHBC, CFP, PFS Tax Partner Rand Gambrell, CPA, ABV, CFE, CFF, CVA Managing Cnsultant