Some Observations on Estate and Business Succession Planning

Erwin Davenport
Gibson, Hotchkiss & Davenport

1. Introduction
   
   
   1. Tax and Estate Planning
   2. Business Continuation
   3. Davenport's two unanswered questions
   
   
   
2. Estate Tax Repeal?  Why Plan?  May Never Happen
   
   
   1. Proper Planning is Still Essential
   2. Revenue is an issue
   3. Total Repeal is Unlikely
   
   
   
3. Business Continuation Plan
   
   
   1. Who is available to run your business in event of early death or retirement?
   2. Estate Planning, including Buy-Sell Agreement and alternative ways to provide for Retirement through qualified plans or ESOP.
   3. Prepare a Business Continuation Plan to serve as a blueprint-update it often.
   4. Who is on the team: Owners, Attorney, CPA, Banker, CLU, Trust Officer, Key Employees, Family Members.
   5. Realize that everyone involved has their own personal agenda. The owner needs to make sure that it's his plan.
   6. Copies of plan furnished to family and other interested players.
   7. Valuation of business for Estate and Gift Tax Purposes.
   8. Business needs, family needs, real estate needs.
   9. Equitable division among family inside and outside the business. "Rough Justice"
   10. The business continuation plan must answer the following questions:
       1. Who are the key employees and what are their roles?
       2. Is there involvement and approval of the plan by the Company's primary suppliers and manufacturers?
       3. How would the company be valued if sold and who are the natural purchasers?
       4. What is the relationship with the Banker and what assurances have been given the Banker would work with the family during the transition of ownership?
       5. What arrangements have been made to pay estate taxes, including the possibility of installment pay out?
       6. What methods will be used to value the business depending on whether the valuation is for estate tax purposes or for purposes of selling the business to company insiders or third parties?
       7. What instructions and authority have been given to the trustee, the family and probate court to retain, or sell the business as appropriate?
   11. Types of Retirement Plans
   12. Covenants Not to Compete by Employees
   13. Key Advisors
   14. Tax Status of Corporation, i.e., Sub-S Corp, C-Corp.
   15. Liquidity Alternatives
       1. Key Man Protection
       2. Funded Cross Purchase Agreement
       3. Funded Deferred Compensation plan to retain key employees.
       4. Retirement plan to complete the funding of a tax sheltered rollover the meet the needs of the surviving spouse.
       5. Irrevocable Life Insurance Trust for widow and children free of estate tax in owner's estate.
       6. Second to Die life insurance in Irrevocable Life Insurance Trust to Provide Liquidity.
   16. Provide Ways to accomplish the above with discounted or leveraged dollars.
   
   
   
4. Individual Goals
   
   
   1. Do you envision retirement-should there be mandatory retirement-should a shareholder be obligated to sell his or her stock to other family members involved in the business?
   2. How much pre tax annual income do you believe you'll need for your retirement?
   3. To what extent will income be available from sources independent of the family business?
   4. How much income is projected to come from company retirement plans?
   5. Do you anticipate selling your stock in the company and real estate in the future or passing it down by gift or inheritance to children?
   6. Do you have any charitable goals?
   
   
   
5. Next Generation Goals
   
   
   1. What is the present age, marital status and academic background of your children and their spouses?
   2. To what extent will your children be involved in the business if they are not already involved? How do you feel about in laws coming into the business?
   3. What are the capabilities of the children. How will they be received by others involved in your business?
   4. What experience have your children had in working for the company?
   5. How might the future leaders of the company get the hands on or industry experience?
   
   
   
6. Planning Techniques.
   
   
   1. Tax Planned Wills
   2. Family Limited Partnership
   3. Discounts
   4. Life Insurance Planning
   5. Pre Marital Agreements
   6. Stock Transfer Restrictions
   7. Buy Sell Agreements
   8. Self Canceling Installment Note
   9. Private Annuities
   10. GRATS
   11. Sales to "Defective" Grantor Trusts
   12. ESOP's
   13. Sale and Lease Back
   14. Going Public
   15. Sale to Outsiders
   16. Advantages of Basis Step Up
   17. Annual Exclusion Gifts
   18. Disability Planning- (Who's in Charge Here?)
   
   
   
7. Final Thoughts
   
   
   1. Business is probably the largest and least liquid asset
   2. Succession Plan can provide for current growth and for preservation of value at retirement and death.
   3. Sale may be advantageous but resisted by family members in business.
   4. Fact gathering is critical.
   5. Team approach is critical.
   6. Techniques to minimize taxes have consequences may result in increased IRS scrutiny. Must consider planning tolerance. May be able to fight the fight with pre tax dollars.
   7. Assemble a team of qualified professionals. Weigh planning costs against benefits derived.
   8. Planning is an ongoing process. Think long term.
   9. Learn to take the time to give thought to estate and business succession-the preservation of the value of the business depends on it.
   10. Consider the personal and psychological issues. Consider Family Dynamics.
   11. Take time to think strategically.