business succession planning
DESCRIPTION
An introduction to the tools and strategies for business succession planningTRANSCRIPT
![Page 1: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/1.jpg)
Business Succession Planning
Karen L. Brady, J.D.
Karen Brady & Associates, P.C.
(303)420-2863
www.coloradobusinessplanning.com
![Page 2: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/2.jpg)
What is Exit Planning?
A systematized process, a customized approach resulting in an owner’s
transition out of the business
![Page 3: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/3.jpg)
Why Exit Planning?
Every owner leaves his or her business – voluntarily or otherwise. At that time, every owner wants to
receive maximum value for his or her business.
![Page 4: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/4.jpg)
Recipe for Successful Exit Plan
• A written plan developed from client’s objectives
• Experienced to to design and implement the plan
• Optimum cash flow to fund the plan
• Management team to succeed owner
• Time to implement the plan
![Page 5: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/5.jpg)
Why Time is Important
• Allow next generation of owners to earn way into business
• Create liquid market for company stock while retaining control
• Provide for owner’s retirement income
• Provide for children not in business
• Protect assets from potential creditors
![Page 6: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/6.jpg)
What Owners Often Want
• Shift wealth to next generation
• Reward loyal employees
• Receive maximum value
• Take business to next level
• Maintain ownership indefinitely
![Page 7: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/7.jpg)
The Team
• Financial/Insurance Advisor• Attorney(s) – Business Planning/Estate
Planning• CPA• Transaction Intermediary (Broker or
Investment Banker)• Banker• Business Consultant
![Page 8: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/8.jpg)
Timing of Transfer
• During Life
• At Death
![Page 9: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/9.jpg)
Challenges
• During Life
- Capital Gains Tax for Owner– Gift Tax for Owner– Funding the Transfer
• At Death
- Estate Tax
- Funding the Transfer
![Page 10: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/10.jpg)
Internal Planning
• Identify successor management
• Provide opportunity to learn
• Establish strong financial controls
• Develop culture of ownership
• Develop relationship between new management and advisor team
![Page 11: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/11.jpg)
Some Techniques
• Buy/Sell Agreements• Family Limited Partnerships• Charitable Remainder Trusts/Private
Annuity Trusts• Nonqualified Deferred Compensation,
including:• ESOPs• 412i
![Page 12: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/12.jpg)
Buy/Sell Agreements
• Agreement between owners• Binding agreement on the triggers and pricing of
transfer when one owner leaves/is pushed• Typical Triggers:
DeathDisabilityDivorce/BankruptcyRetirement (including R.I.P. – retired in place)Termination
![Page 13: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/13.jpg)
Buy/Sell Challenges
• Pricing, which can raise IRS flags
• Funding
• Minimal wealth transfer/estate planning accomplished
![Page 14: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/14.jpg)
Family Limited Partnership/FLLC
• Divide ownership from use, benefit, and control
• Discounts are a “bonus”
• Allows inclusion of children not in the business
• Some asset protection for owner and next generation
![Page 15: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/15.jpg)
Disadvantages of FLP/FLLC
• Complexity of separate entities
• Fiduciary duty of General Partner
• IRS scrutiny
• Loss of step-up in basis at death
![Page 16: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/16.jpg)
Split Interest Trusts
• Charitable Remainder Trusts
• Private Annuity Trusts
• Defer capital gain tax (sometimes indefinitely for CRTs)
• Charitable Deduction offset other tax bite, as in use of retirement funds
![Page 17: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/17.jpg)
Disadvantages
• In PATs, can’t benefit from up market
• In CRTs, nothing for kids to inherit
• In PATs – trust’s “real basis” can be less than anticipated basis if owner dies early
• If owner lives past life expectancy, trust may not be able to pay as promised
![Page 18: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/18.jpg)
Nonqualified Deferred Compensation
• Promise to pay later for services performed now
• Deferral must be agreed to before services are performed
• If compensation plan is funded (with trust, insurance, etc.) – must be substantial risk of forfeiture to the employee, otherwise constructive receipt
![Page 19: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/19.jpg)
When can pay out
• Separation from Service
• Disability
• Death
• Specified time pursuant to pre-arranged schedule
• Change in ownership
• Unforeseeable emergency
![Page 20: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/20.jpg)
NQDC – Employee’s Perspective
• No income tax until compensation received
• Appreciation depends on contract
• Risk of Loss to Creditors of Employer
• Risk of Loss Because Employer Lacks Resources/Liquidity
• Part of Estate and is IRD
![Page 21: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/21.jpg)
NQDC – Employer’s Perspective
• Keep Good Employees
• Fund Owner’s Buyout
• Can’t deduct as expense until compensation is paid
• Shows up on balance sheet
• Costs of Administration
![Page 22: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/22.jpg)
Common NQDC
• Direct Agreement – no funding, just a promise to pay later (minimum wage must still be paid now)
• Rabbi Trust – Employer funds trust but trust subject to employer’s creditors (no income tax paid by employee until accesses trust)
• Secular Trust – Employer funds trust which isn’t subject to creditors (employee pays income tax as trust is funded, but appreciation is tax-deferred)
![Page 23: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/23.jpg)
Other NQDC Ideas/Names
• Phantom Stock
• Incentive Stock Options
• Nonqualified Stock Options
• Top Hat Plans
• Excess Benefit Plans
• Insurance Arrangements
![Page 24: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/24.jpg)
Employee Stock Ownership Plan (ESOP)
• Company establishes ESOP
• ESOP borrows funds to purchase stock – from company, owner, or bank
• ESOP purchases stock from owner
• Owner who sells can reinvest in “qualifying replacement securities” and defer capital gain – like a 1031 exchange
![Page 25: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/25.jpg)
ESOP Advantages
• For Owner
Creates liquidity
Diversify investments without paying immediate tax
Creates market for company stock
Removes cash from company value
![Page 26: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/26.jpg)
ESOP Advantages
• For Employees
Become owners/vested in company
Fund retirement
![Page 27: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/27.jpg)
ESOP Disadvantages
• Complexity
• Still need individuals who can manage business after owner leaves
![Page 28: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/28.jpg)
412i Plans
• Still a good idea in a narrow set of facts
• Defined benefit pension plan
• Promise to employee specific amount of retirement benefit based on compensation, years of service, or both, funded exclusively by life insurance or annuity contracts
![Page 29: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/29.jpg)
Reasons to Consider 412i
• Employer can place large amount of cash all at once and take immediate deduction
• Exempt from usual minimum funding standards for defined benefit plans
• Conservative assumptions of investment growth
• Insurance removes risk of employer guaranty of funds in plan
![Page 30: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/30.jpg)
412i Disadvantages
• Investments may be more conservative than would otherwise make
• Lack of flexibility• No loans to participants• Business must have cash flow to assure funding• Initial setup can be relatively high• Requirements to provide for other employees
often makes 412i best for cos. where owners are only employees
![Page 31: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/31.jpg)
412i Requirements
• Funded exclusively by life insurance or annuity contract(s) and guaranteed by those contracts
• Insurance contracts must provide level annual premium payments beginning date participant is part of plan and not going beyond participant’s retirement age
• Benefits of plan must be equal to benefits provided by insurance contract
![Page 32: Business Succession Planning](https://reader035.vdocuments.us/reader035/viewer/2022081414/54b5e4ff4a7959bf598b4965/html5/thumbnails/32.jpg)
Business Succession Planning
Karen L. Brady, J.D.
Karen Brady & Associates, P.C.
(303)420-2863
www.coloradobusinessplanning.com