BUSINESS SUCCESSION PLANNING FOR ESTATE PLANNERS First Run Broadcast: October 26, 2016 Live Replay: June 1, 2017 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) One of the biggest challenges common to most family businesses is succession. Who s next? After a founder chooses to retire, or forced into it by disability or incapacity, or dies, who among the next generation can step competently into senior leadership, preserve the economic value of the company, and do so without creating a rupture in the family? Many successful family businesses founder because this process is not carefully planned and executed. And succession planning is an inseparable part of trust and estate planning. Without succession planning, all the elaborate transfer and tax plans are without a goal. This program will provide you with a process for anticipating and techniques for mitigating family drama in succession planning, and discuss several practical alternatives for transferring control and ownership. Anticipating and mitigating family drama in succession planning Common drama triggers lack of communication, income expectations of family members, intra-family strife Planning for phased withdrawal of a senior generation using lifetime gifting Use of buy-sell agreements with key family and non-family members Sales to third-parties where an equitable or peaceable within the family is not possible Planning for the disability or incapacity of key members of the senior generation Issues involving key non-family member employees and their retention in the succession Speakers: David T. Leibell is Senior Wealth Strategist at UBS Private Wealth Management in New York City, where he provides clients comprehensive strategies to assist in the preservation, transfer and management of wealth. He also serves as an internal resource for UBS clients on all issues related to tax, estate planning, philanthropy and wealth planning. He is chairman of the Family Business Committee for Trusts and Estates Magazine and is listed in The Best Lawyers in America for two practice areas Trusts and Estates and Charities/Non Profits. Before joining UBS, he was a partner in the Private Client Services Department of Wiggin and Dana, LLP in Greenwich, Connecticut. Mr. Leibell received his B.A. from Trinity College and his J.D. from Fordham Law School. Daniel L. Daniels is a partner in the Greenwich, Connecticut office of Wiggin and Dana, LLP, where his practice focuses on representing business owners, corporate executives and other wealthy individuals and their families. A Fellow of the American College of Trust and Estate Counsel, he is listed in The Best Lawyers in America, and has been named by Worth magazine as one of the Top 100 Lawyers in the United States representing affluent individuals. Mr. Daniels is co-author of a monthly column in Trusts and Estates magazine. Mr. Daniels received his A.B., summa cum laude, from Dartmouth College and received his J.D., with honors, from Harvard Law School.
PROFESSIONAL EDUCATION BROADCAST NETWORK Speaker Contact Information BUSINESS SUCCESSION PLANNING FOR ESTATE PLANNERS David T. Leibell UBS Private Wealth Management New York City (o) (212) 821-7063 david.leibell@ubs.com Daniel L. Daniels Wiggin & Dana, LLP - Greenwich, Connecticut (o) 203-363-7665 ddaniels@wiggin.com
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Estate Planning for the Closely Held Business Owner Daniel L. Daniels and Michael T. Clear
2 Introduction Special Challenges for Succession Planning for Closely Held Businesses Analysis / Paralysis Phased Based Planning
3 Phase One Planning: Key Elements Tax efficient wills and revocable trust agreements Fiduciary role education and selection Probate avoidance Anti-divorce planning Incapacity planning Asset protection / entity choice Shareholder agreement
4 Phase Two Planning: Lifetime Gifting Airtight Transfer Tax System Leaks in the System Freezing Value Discounting Value Removing Value
5 Phase Two Planning: Typical Strategies for Business Owners Spousal Lifetime Access Trusts (SLAT) Sale to Intentionally Defective Irrevocable Trust (IDIT) Grantor Retained Annuity Trusts (GRAT)
6 Phase Two Planning: SLAT Trust with spouse and descendants as beneficiaries Used for freezing, discounting and removing values Benefits Estate reduction Simple to create and administer Continuing access and control for grantor s spouse Grantor Trust Generation skipping
7 Phase Two Planning: IDIT Sale Business owner establishes SLAT (or other irrevocable trust) Business owner makes a gift to the SLAT (e.g. $2 million) Sometime later, business owner sells an interest in business to the SLAT in return for the SLAT s promissory note Note provides for payment of interest-only for 9 years with a balloon payment of principal due at the end of the 9 year term Interest rate is set at the lowest rate permitted under the tax code (June rate is 1.41%, example uses April rate of 1.45%) For this example, assume enterprise value of LP interest is $15 million but 33% valuation discount is applied so that the value for purposes of the sale transaction is $10 million
8 Step 1: Seed Capital Gift of $2 million to SLAT Business Owner SLAT $2 million gift
9 Step 2: Business owner sells limited partnership interest appraised at $10 million to SLAT for SLAT s $10 million promissory note Note Business Owner SLAT $2 million LP Interest
10 Step 3: SLAT Uses Partnership Distributions to Service Note Interest and principal payments Business Owner ($10 mm Promissory Note) SLAT (LP Interest Subject to $10 mm Note) Partnership Distributions $$ Limited Partnership
11 Numerical Example: LP Interest Grows and/or Produces Income Greater Than Debt Service Initial value of property $15,000,000 Valuation discount 33% Discounted value of property $10,000,000 Interest rate on promissory note 1.45% Assumed rate of return 5.00% Year Beginning Value Return Note payment End Value 1 $15,000,000 $750,000 ($145,000) $15,605,000 2 $15,605,000 $780,250 ($145,000) $16,240,250 3 $16,240,250 $812,013 ($145,000) $16,907,263 4 $16,907,263 $845,363 ($145,000) $17,607,626 5 $17,607,626 $880,381 ($145,000) $18,343,007 6 $18,343,007 $917,150 ($145,000) $19,115,157 7 $19,115,157 $955,758 ($145,000) $19,925,915 8 $19,925,915 $996,296 ($145,000) $20,777,211 9 $20,777,211 $1,038,861 ($10,145,000) $11,671,071 Value Removed From Taxable Estate (in SLAT): $11,671,071 Approximate Estate Tax Savings: $5,835,536
12 Phase Two Planning: IDIT Sale: Tax Considerations IRS may treat a portion of the sale as a gift Remote risk that IRS would treat entire transfer as a gift If transaction not administered carefully, risk that IRS will bring the entire trust back into the business owner s estate at death If grantor trust status turned off while the note is outstanding or during any period in which the trust has negative basis assets, taxable income will be recognized If note remains unpaid at business owner s death, there may be capital gains tax on the unpaid balance at that time A gift tax return should be filed reporting both the seed capital gift and the sale transaction
13 Phase Two Planning: GRAT Trust with spouse and descendants as beneficiaries Used for freezing, discounting and removing values Benefits Estate reduction Simple to create and administer Continuing access and control for grantor s spouse Grantor Trust Generation skipping?
14 Phase Two Planning: GRAT Zeroed-Out GRAT Grantor transfers $1 million to a GRAT when IRS assumed interest rate = 1.4% Grantor receives $119,000 annually for 9 years After 9 years, remaining GRAT funds pass to children Value of taxable gift is near $0
15 Phase Two Planning: GRAT Savings Dependent on Investment Performance Average Return Amount Passing Tax Free 1.4% $0 4.0% $164,000 6.0% $322,000 8.0% $513,000
16 Phase Two Planning: GRAT Property suitable for a GRAT Growth stocks Commercial real estate Closely held business LLCs and LLP
17 Phase Two Planning: GRAT Risks Grantor dies before termination of GRAT At worst, property taxable in grantor s estate Nothing gained, but nothing lost Investment underperforms IRS assumed rate Nothing gained, but nothing lost Grantor receives $119,000 annually for 9 years
18 Daniel L. Daniels Daniel L. Daniels is a partner in Wiggin and Dana's Private Client Services Department and a member of the firm's Executive Committee. He divides his time between the firm's Greenwich and New York offices. Dan focuses his practice representing business owners, private equity and hedge fund founders, family offices and other wealthy individuals and their families. He received his A.B., summa cum laude, from Dartmouth and his J.D., cum laude from Harvard Law School. ddaniels@wiggin.com 203-363-7665
19 Michael T. Clear Michael T. Clear is a partner in Wiggin and Dana's Private Client Services Department. Michael focuses his practice on estate planning, estate and trust administration, probate litigation and business succession planning. He guides fiduciaries and beneficiaries through estate settlement and trust administration matters. His estate and trust administration practice often intertwines with his probate litigation practice where he advises clients in will and trust construction cases, contested accounting proceedings, fiduciary removal proceedings, payment of unpaid claims and conservatorship and guardianship matters. Michael received his J.D. magna cum laude from the Quinnipiac University School of Law. mclear@wiggin.com 203-363-7675
20 Wiggin and Dana Wiggin and Dana LLP is a full-service law firm of approximately 150 lawyers with offices in the Northeast, including Connecticut, New York, Philadelphia and Washington, DC. Since its founding in 1934, the Firm has served the legal needs of entrepreneurs, corporate executives and other wealthy individuals and their families, as well as charitable and educational institutions, emerging companies, middle market business organizations and Fortune 500 corporations.