Business Succession Planning
Monday, March 14, 2016
If you co-own a business, you need a buy-sell agreement. Also called a buyout agreement, this document is essentially the business world’s equivalent of a prenup. An effective buy-sell agreement helps prevent conflict between the company’s owners, while also preserving the company’s closely held status. Any business with more than one owner should address this issue upfront, before problems arise.
With a proper buy-sell agreement, all business owners are protected in the event one of the owners wishes to leave the company. The buy-sell agreement establishes clear procedures that must be followed if an owner retires, sells his or her shares, divorces his or her spouse, becomes disabled, or dies. The agreement will establish the price and terms of a buyout, ensuring the company continues in the absence of the departing owner.
A properly drafted buy-sell agreement takes into consideration exactly what the owners wish to happen if one owner departs, whether voluntarily or involuntarily. Do the owners want to permit a new, unknown partner, should the departing owner wish to sell to an uninvolved third party? What happens if an owner’s spouse is involved in the business and that owner gets a divorce or passes away? How are interests valued when a triggering event occurs?
In crafting your buy-sell agreement, consider the following issues:
Triggering Events - What events trigger the provisions of the agreement? These normally include death, disability, bankruptcy, divorce and retirement.
Business Valuation - How will the value of shares being transferred be determined? Owners may determine the value of shares annually, by agreement, appraisal or formula. The agreement may require that the appraisal be performed by a business valuation expert at the time of the triggering event. Some agreements may also include a “shotgun provision” in which one party proposes a price, giving the other party the obligation to accept or counter with a new offer.
Funding - How will the departing owner be paid? Many business owners will obtain insurance coverage, including life, disability, or business continuation insurance on the life or disability of the other owners. With respect to life insurance, the agreement may provide that the company redeem the departing owner’s shares (“redemption”). Alternatively, each of the owners may purchase life insurance on the lives of the other owners to provide the liquidity needed to purchase the departing owner’s shares (“cross purchase agreement”). The agreement may also authorize the company to use it’s cash reserves to buy-out the departing owners.
Wednesday, July 29, 2015
Given that this situation encompasses various areas of law, you should consult both a matrimonial and a business law attorney. Depending upon the type of business the division between you and your soon-to-be ex-wife may be straightforward. However, more than likely, it may take significant work to be able to divide the business. If you and your wife intend to continue to own and/or operate the business together, you could simply divide the ownership between the two of you.
Otherwise, the two of you have to continue to work together until the business is actually sold or dissolved. If the business is such that it has two distinct areas you could spin off one of those into a separate entity that can be owned by one of you. If the business owns real estate, perhaps some of the real estate could be transferred into a new entity to be owned by one of you with the other of you retaining the ownership of the original entity. If the business is such that it is almost impossible to divide, then perhaps one of you becomes the sole owner of the business and has to pay the other over some period of time for the value of one half of that business. Instead of paying the other of you perhaps an outside loan from a bank or other lending institution could be obtained to provide the funding for the purchase price.
A final option may be that the business has to be sold to an outside third party and the proceeds would be divided between you and your wife in accordance with any agreement between the two of you that have been approved by the divorce court or pursuant to an order.
Monday, May 25, 2015
Most employers know that their workers are protected from discrimination while they are employed. Surprisingly, some are unaware that prospective employees are protected throughout the application and hiring process as well. Title VII of the Civil Rights Act of 1964, Title I of the Americans with Disabilities Act, the Pregnancy Discrimination Act and the Age Discrimination in Employment Act of 1967, as well as other Federal and state laws, are all applicable to prospective employees. Therefore, employers must be extremely careful about the questions they ask individuals applying for a position.
Employers should shy away from asking any questions that might give a prospective employee reason to believe they were not selected for a position due to discrimination. Employers should not inquire about an applicant’s race, unless it is for an Equal Employment Opportunity Commission purpose (which should be noted). They should also not ask about an applicant’s citizenship status and instead should inquire as to whether the individual has authorization to work in the United States.
Employers should also be sensitive to discrimination based on gender and sexual orientation when conducting interviews. They should not ask gender-related questions or anything regarding pregnancy or children. It is also not a good idea to ask a prospective employee about marital status or religion. An employer might be concerned that a prospective employee will miss work due to young children or religious holidays. But, if they are concerned about an applicant’s attendance, they should only ask about attendance records at previous places of employment. Now, many states have laws relating to discrimination based on sexual orientation and employers should be careful not to inquire about this detail as well.
Individuals with disabilities are protected under Federal and state law. An employer should never ask about a disability. All that matters is that the individual is able to perform job duties, so an employer should only inquire about functioning in that respect. For example, if the applicant is interested in an inventory position that requires standing for the entire 8 hour shift and lifting heavy boxes, but the applicant suffers from a disability, the employer should only ask whether their disability prohibits them from performing these duties. Many states now have or are in the process of passing laws that prohibit discrimination based on criminal convictions, so employers should be aware not to ask about an applicant’s criminal history unless they are sure it is allowed under their state’s law. For the same reason, employers should not ask about credit history or personal finances unless these characteristics have a direct affect on the applicant’s ability to do their job.
If you are a business owner, it is in your best interest to put together a list of interview questions for prospective employees and to review that list with an experienced attorney. You should also be sure that all of the parties conducting interviews are aware of the rules relating to interview questions and abide by them.
Monday, May 11, 2015
Business succession plans contemplate and instruct regarding any changes in future ownership and management of a business. Most business owners know they should think about succession planning, but few actually end up doing so. It is hard to think about not being in charge of the business you have built up, but a proper succession plan can ensure that your business continues long after you are there to run it, providing an enduring legacy.
Here are a few tips to keep in mind when you begin to think about putting a succession plan into place for your business.
- Proper plans take time - often years - to develop and implement because there are many steps involved. It is really never too early to start thinking about how you want to hand off control of your business.
- Succession plans are a waste of time unless they are more than a piece of paper. Involving attorneys, accountants and business advisors ensures that your plan is actually implemented.
- There is no cookie-cutter succession plan that fits all businesses, and no one way to develop and implement a successful plan. Each business is unique, so each business needs a custom-made plan that fits the needs of all parties involved.
- It may seem counterintuitive, but transferring a business between people who are familiar with the business - from one family member to another, or between business partners - is often more complicated than selling the business to a complete stranger. Emotional investments cannot be easily quantified, but their importance is real. Having a neutral party at the negotiating table can help everyone involved focus on what is best for the business and the people that are depending on it for their livelihood.
- Once a succession plan has been established, it is critically important that the completed plan be continually reviewed and updated as circumstances change. This is one of the biggest reasons having an attorney on your succession planning team is important. Sound legal counsel can assist you in making periodic adjustments and maintaining an effective succession plan.
If you are ready to start thinking about succession planning, contact an experienced business law attorney today.
Monday, April 13, 2015
There are many reasons for retaining tax records. They can be a useful guide for business planning, for tracking receipts and expenses, and in cases where the company or shares are being sold to outside parties.
The IRS expects taxpayers to keep records for as long as they are needed to administer any part of the Internal Revenue Code. In other words, if you fail to keep records, and an item in a past return is questioned, you may not have the documentation you need to defend yourself and avoid taxes and penalties. In addition, insurance companies and creditors may wish to see tax returns even after the IRS no longer does.
What is the "Period of Limitations" for a Tax Return?
Generally, you must keep records that support income and deductions for a tax return until the "period of limitations" for that return elapses. This is the period during which you can still amend your return to get a refund or credit and during which the IRS can still assess more tax. It varies depending on the circumstances surrounding each return.
- If you owe additional tax, but you haven't seriously underpaid, committed fraud, or failed to file a return, the period is 3 years from the date taxes were filed.
- If you failed to report income that you should have reported, in excess of 25% of the gross income that you did report, the period is 6 years.
- If you filed a claim for credit or refund after you filed your return, the period is the later of 3 years after the return was filed or 2 years after tax was paid.
- If you filed a claim for a loss from worthless securities or a bad debt deduction, the period is 7 years.
- If you filed a fraudulent return or failed to file a return, the period is unlimited.
Note: Returns filed before taxes are due are treated as though they were filed on the due date.
Other Periods of Limitations
Additionally, if you are an employer, you must keep employee tax records for at least 4 years after the later of the date the tax becomes due or the date it is paid.
For assets, you should keep records until the period of limitations elapses for the year in which you sell the property in a taxable transaction. You will need records to compute depreciation, amortization, or depletion deductions and to add up your basis in the property for purposes of calculating gain or loss. A business law attorney experienced in tax matters can further guide you in relation to your specific situation
Tuesday, October 28, 2014
Borrowing from your retirement accounts: Issues to consider
So you have credit card debt, overdue mortgage payments, or suddenly need to buy a new car. We’ve all been there. You need money now, and your retirement accounts continue to climb. Fortunately, many employers allow you to take out loans on these accounts, but should you really begin spending that money before you retire?
On one hand, there are benefits to borrowing from your retirement accounts. You are essentially borrowing your own money, so the payments you make, plus interest, go back into your account. Since it’s your own money, these payments do not affect your credit score, and most 401(k) loans have relatively low interest rates.
However, there are many risks associated with taking money from accounts like your 401(k). It is recommended that you see a financial advisor before making this decision to address the cost and potential ramifications of the loan.
First consider the reason for taking out a loan, and the multiple options that you face. A dire emergency is the only recommended cause for borrowing from these accounts; some plans even require it. If you’re looking to spend the money on something more frivolous, like a family vacation or a new entertainment system, however, you should consider alternate financing options.
The downside to these loans comes in handling the repayment plan. Interest paid to your own account sounds easy enough, but these payments are subject to taxes. Furthermore, once money is borrowed from your retirement account, it is no longer eligible for tax-deferred growth. Payments you make on the loan come from after-tax assets, so the money you repay into your account can end up getting taxed for a second time once you withdraw after retirement.
A standard 401(k) loan allows you to borrow up to half of your balance, with a maximum of $50,000. Normally, you have up to five years to repay the loan. Failure to do so within the five-year period means your loan will be deemed an early withdrawal, and will be subject to taxes as well as a 10% early withdrawal penalty.
If you are looking to borrow money from your retirement accounts, carefully consider your repayment plan in advance. It’s especially important to make certainthat you are secure in your employment; if you leave or lose your job, your loan payments will be due within 90 days. Consider borrowing only if interest on a loan from your retirement plan would be less than that of another loan alternative. A final tip: Continue contributing to your 401(k) while you pay off the loan to lessen the impact on your savings.
Tuesday, August 26, 2014
You’ve had an attorney draft your estate planning documents, including your living trust and will. Probate avoidance and tax saving strategies have been implemented. Your documents are signed, notarized and witnessed in accordance with all applicable laws, and are stored in a location known to your chosen executor or estate administrator. Your work is done, right? Not exactly.
Although treasure hunts may be fun for youngsters, the fiduciaries of your estate will not find inventorying your assets to be nearly as exciting. When it comes time to settle your affairs, your estate representatives will be charged with the responsibility to gather and manage your assets, pay off debts and taxes, and distribute your assets to your named beneficiaries. This can be a tall order for an outsider who is likely unaware of the full scope of your assets.
If your fiduciaries cannot determine exactly what property you own, and its value and location, you are setting up your loved ones for a frustrating treasure hunt that can delay the settlement of your estate and rack up additional estate-related expenses. You may be remembered for the frustration of locating your assets, rather than the gifts made upon your death – not a legacy many wish to leave.
Instead, as you are establishing your estate plan take the extra time to record a comprehensive asset inventory and make sure those who will be responsible for settling your estate know where that inventory is stored. Do not presume that everything is handled once you meet with a lawyer and sign your documents. The legal instruments you have gone to the time, trouble and expense to prepare are practically worthless if your assets cannot be identified, located and transferred to your beneficiaries. However, creating a thoughtful asset inventory will aid your loved ones in closing your estate and honoring your memory.
Nobody knows better what assets you own than you. And who better than you to know an item’s value, age or location? Your fiduciaries may not have the benefit of tax or registration renewal notices for titled assets, and certainly won’t have copies of the titles or deeds – unless you provide them. It’s a good idea to include copies of the following items with your asset inventory:
- Deeds to real property
- Titles to personal property
- Statements for bank, brokerage, credit card and retirement accounts
- Stock certificates
- Life insurance policy
- Tax notices
For each of the above assets you should also list names and contact information for individuals who can assist with each the underlying assets, such as real estate attorneys, brokers, financial planners and accountants.
If your estate includes unique objects or valuable family heirlooms, a professional appraisal can help you plan your estate, and help your representatives settle your estate. If you have any property appraised, include a copy of the report with your asset inventory.
Care should be taken to continually update your asset inventory as things change. There will likely be many years between the time your estate plan is created and the day your fiduciaries must step in and settle your estate. Properties may be bought or sold, and these changes should be reflected in your asset inventory on an ongoing basis.
Thursday, July 3, 2014
You’ve Established an Estate Plan. Do You Know Where the Documents Are? Does Your Family?
For most people, finally establishing an estate plan is a big step that they have undertaken after years of delay. A second step is making decisions regarding the executor, trustees, beneficiaries, funeral costs and debt, and a third step is actually completing the will. There is, however, a fourth step that is often skipped: placing the original will and other critical documents in a place where it can be found when it is needed.
As far as wills are concerned, this step is more important than you might think, for two reasons:
- If your will can’t be found upon your death then, legally, you will have passed away intestate, i.e. without a will.
- If your loved ones can only locate a photocopy of your will, chances are the photocopy will be ruled invalid by the courts. This is because the courts assume that, if an original will can’t be located, the willmaker destroyed it with the intention of revoking it.
Options for Storing the Original Copy of Your Will
Because an original will is usually needed by the probate court, it makes sense to store it in a strategic location. Common locations recommended by estate planning attorneys include:
- A fireproof safe or lock box
- Stored at the local probate court, if such service is provided.
- A safety deposit box in a bank
There are advantages to each choice. For many, a fireproof safe is simplest: it’s in the home, doesn’t need to leave the house and can be altered and replaced with maximum convenience. The probate court makes sense because it is the place where the last will and testament may end up when you pass away. A safety deposit box also makes sense, especially if you already have one for which you’re paying. Just make sure that your executor can access it.
By making sure that your original will is safe and can be found when needed, you don’t just ensure that it can be used when the allocation of your assets and debt occurs. You also ensure that disputes, confusion and disappointment don’t occur years after your death; while uncommon, in some cases, by the time the will has been discovered, the assets of the decedent have long been distributed according to intestacy laws and not the decedent’s will. Intestacy laws are essentially the “default will” that the state establishes for individuals who do not have their own estate plan.
You’ve taken the trouble to protect your assets and loved ones by creating an estate plan. Don’t leave its discovery to chance. Ensure that your executor or trustee can easily and reliably find it when it comes time to put it into effect.
Monday, August 26, 2013
Utilizing Family Limited Partnerships as Part of Your Estate Plan
Designed to preserve family businesses for future generations, Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) can help shelter your assets and reduce overall estate and gift taxes. FLPs are also utilized as an integral part of business succession planning.
A Family Limited Partnership is typically established by married couples who place assets in the FLP and serve as its general partners. They may then grant limited-partnership interests to their children, of up to 99% of the value of the FLP’s assets. When this occurs, two things happen: a) the value of the partnership interests transferred to the children is deemed to be lower than the respective pro-rata value because of minority and marketability discounts and b) the assets are removed from the general partners’ estates. This allows a transfer of significant assets to the children at lower valuation which results in reduced estate taxes. The general partners continue to maintain control of the FLP and its assets, even though they may own as little as just 1% of the partnership’s valuation.
Limited partners may receive distributions from the FLP which can serve to transfer additional assets from the older generation to younger beneficiaries at more favorable income tax rates.
How Minority and Marketability Interest Discounts Work
Since limited partners do not have the ability to direct or control the day-to-day operations of the partnership, a minority discount can be applied to reduce the value of the limited partnership interests that are transferred. Furthermore, because the partnership is a closely-held entity and not publicly-traded, a discount can be applied based upon the lack of marketability of the limited partnership interests. This allows the older generation to leverage the FLP as a vehicle to transfer more wealth to its beneficiaries, while retaining control of the underlying assets.
With these significant tax benefits, it’s no surprise that many FLPs have attracted scrutiny from the IRS. Many family partnerships have run into issues with tax authorities due to mistakes or outright abuse. Care must be taken to ensure your FLP is properly established and operated. Specifically, the IRS may look at the following issues when assessing the viability of the FLP:
Whether the establishment of the FLP was created solely for tax mitigation objectives. You stand a better chance of avoiding – or surviving – a challenge from the IRS if you can show a legitimate non-tax-related reason the FLP was created.
Whether the partnership functions like a business. Keep your personal assets out of the FLP. You can reasonably expect to transfer closely held stock or interests in commercial real estate into a Family Limited Partnership. However, personal property such as cars or residences may not fare well against an IRS challenge. Similarly, the FLP’s assets should not be used to pay for any personal expenses. The FLP must be a legitimate business entity operated to fulfill business purposes.
Whether the valuations are based on objective criteria. Rather than have a partner or family member determine the valuations or discounts for any assets transferred into the FLP, you should have your FLP professionally appraised. A qualified appraiser has a much better chance of withstanding IRS scrutiny.
An FLP can be a powerful planning tool to enable business owners to transfer their stake to the younger generation, while allowing the senior generation to continue conducting operations and mentoring and grooming the young owners. However, an FLP can be incredibly complex and should only be established with the help of a qualified team of estate planning attorneys, accountants and appraisers.
Saturday, May 25, 2013
Avoid Family Feuds through Proper Estate Planning
A family feud over an inheritance is not a game and there is no prize package at the end of the show. Rather, disputes over who gets your property after your death can drag on for years and deplete your entire estate. When most people are preparing their estate plans, they execute wills and living trusts that focus on minimizing taxes or avoiding probate. However, this process should also involve laying the groundwork for your estate to be settled amicably and according to your wishes. Communication with your loved ones is key to accomplishing this goal.
Feuds can erupt when parents fail to plan, or make assumptions that prove to be untrue. Such disputes may evolve out of a long-standing sibling rivalry; however, even the most agreeable family members can turn into green-eyed monsters when it comes time to divide up the family china or decide who gets the vacation home at the lake.
Avoid assumptions. Do not presume that any of your children will look out for the interests of your other children. To ensure your property is distributed to the heirs you select, and to protect the integrity of the family unit, you must establish a clear estate plan and communicate that plan – and the rationale behind certain decisions – to your loved ones.
In formulating your estate plan, you should have a conversation with your children to discuss who will be the executor of your estate, or who wants to inherit a specific personal item. Ask them who wants to be the executor, or consider the abilities of each child in selecting who will settle your estate, rather than just defaulting to the eldest child. This discussion should also include provisions for your potential incapacity, and address who has the power of attorney.
Do not assume any of your children want to inherit specific items. Many heirs fight as much over sentimental value as they do monetary items. Cash and investments are easily divided, but how do you split up Mom’s engagement ring or the table Dad built in his woodshop? By establishing a will or trust that clearly states who is to receive such special items, you avoid the risk that your estate will be depleted through costly legal proceedings as your children fight over who is entitled to such items.
Take the following steps to ensure your wishes are carried out:
Discuss your estate planning with your family. Ask for their input and explain anything “unusual,” such as special gifts of property or if the heirs are not inheriting an equal amount.
Name guardians for your minor children.
Write a letter, outside of your will or trust, that shares your thoughts, values, stories, love, dreams and hopes for your loved ones.
Select a special, tangible gift for each heir that is meaningful to the recipient.
Explain to your children why you have appointed a particular person to serve as your trustee, executor, agent or guardian of your children.
If you are in a second marriage, make sure your children from a prior marriage and your current spouse know that you have established an estate plan that protects their interests.
Wednesday, May 15, 2013
How Much of Your Estate Will Be Left Out of Your Will? (It’s Probably More Than You Think)
You’ve hired an attorney to draft your will, inventoried all of your assets, and have given copies of important documents to your loved ones. But your estate planning shouldn’t stop there. Regardless of how well your will is drafted, if you do not take certain steps regarding your non-probate assets, you run the risk of unintentionally disinheriting your chosen beneficiaries from a significant portion of your estate.
A will has no effect on the distribution of certain types of property after your death. Such assets, known as “non-probate” assets are typically transferred upon your death either as a beneficiary designation or automatically, by operation of law.
For example, if your 401(k) plan indicates your spouse as a designated beneficiary, he or she automatically inherits the account upon you passing. In fact, by law, your spouse is entitled to inherit the funds in your 401(k) account. If you wish to leave your 401(k) retirement account to someone other than a surviving spouse, you must obtain a signed waiver from your spouse indicating her agreement to waive her rights to the assets in that account.
Other types of retirement accounts also transfer to your beneficiaries outside of a probate proceeding, and therefore are not subject to the provisions of your will. An Individual Retirement Account (IRA) does not automatically transfer to your spouse by operation of law as is the case with 401(k) plans, so you must complete the IRA’s beneficiary designation form, naming the heirs you want to inherit the account upon your death. Your will has no effect on who inherits your IRA; the beneficiary designation on file with the financial institution controls who will receive your property.
Similarly, you must name a beneficiary on your life insurance policy. Upon your death, the insurance proceeds are not subject to the terms of a will and will be paid directly to your named beneficiary.
Probate avoidance is a noble goal, saving your loved ones both time and money as they close your estate. In addition to the assets listed above, which must be handled through beneficiary designations, there are other types of assets that may be disposed of using a similar procedure. These include assets such as bank accounts and brokerage accounts, including stocks and bonds, in which you have named a pay-on-death (POD) or transfer-on-death (TOD) beneficiary; upon your passing, the asset will be transferred directly to the named beneficiary, regardless of what provisions are in your will. Depending on the state, vehicles may also be titled with a TOD beneficiary.
To make these arrangements, submit a beneficiary designation form to the applicable financial institution or motor vehicle department. Be sure to keep the beneficiary designations current, and provide instructions to your executor listing which assets are to be transferred in this manner. Most such designations also allow for listing of alternate beneficiaries in case they predecease you.
Another common non-probate asset is real estate that is co-owned with someone else where the deed has a survivorship provision in it. For example, many deeds to real property owned by married couples are owned jointly by both husband and wife, with right of survivorship. Upon the passing of either spouse, the interest of the passing spouse immediately passes to the surviving spouse by operation of law, irrespective of any conflicting instructions in your will. Keep in mind that you need not be married for such a provision to be in effect; joint ownership of real property with right of survivorship can exist among any group of co-owners. If you want your will to be controlling with regard to disposition of such property, you need to have a new deed prepared (and recorded) that does not have a right of survivorship provision among the co-owners.
You’ve spent a lifetime of hard work to accumulate your assets and it’s important that you take all necessary steps to ensure that your wishes regarding who will get your assets will be honored as you intend. Carve a few hours out of your busy schedule, several times a year, to review all of your deeds and beneficiary designations to make certain that they remain consistent with your objectives.
The Fenelli Law Firm located in Laguna Hills, CA serves clients with estate planning, special needs trusts, planning for children, asset protection, probate & trust administration, conservatorship / guardianships, business succession planning, & corporate entity formation needs throughout Los Angeles, San Diego, and Orange County CA.