1. Tax Practitioner Institute 2016 Estate Planning for the Business – Succession & Exit Plans
By: Robert E. Danielson, Esq.
Law Offices of Robert E. Danielson
65 West Commercial St., Suite 106
Portland, ME 04101

2. Family business is the most common form of business around the world!
Nearly 80% of businesses around the world are family enterprises.
90% of American businesses are family owned or controlled.
In the U.S., family businesses contribute more than 50% of the gross domestic product and more than 50% of the job opportunities.

3. Quality Succession and Exit Plans begin with an understanding of your client’s goals...
Common business owner objectives include:
Keeping the business intact and in the family
Treating all family members fairly (if not equally)
Producing adequate retirement income for the business owners
Keeping the business running smoothly after the owner’s exit
Minimizing tax consequences to the business owner – both during the transition out of the business and after death

4. Any planning should start with a careful review of the existing business...
Consider the structure of the existing business:
Corporate structure, including:
LLC, S-corp, C-corp
Operating agreements
Shareholder agreements
Classes of Stock and types of stock
Management structure
Is your client the sole manager?
Is there a board of directors?
A management team?

5. Next, work with the client to put together a 3-5 year plan...
Consider-
The client’s –
Financial situation
Mental and emotional state
Existing estate plan
The business’s -
financial situation
Operations
Compliance with laws and regulations
Insurance coverage
VALUE...

6. Knowing the value of the business is crucial to protecting the client’s interests and creating a solid succession or exit plan...
As part of the 3-5 year plan, the business owner should have the business professionally valued.
This can help to provide a basic “fair market value” for the company that can be used for planning purposes.

7. Valuation Basics
IRS Rev. Ruling provides the foundation for valuation
The ruling provides a number of factors that can be used to determine the business’s value .
No single factor is determinative – nor are the factors weighed equally.
How the factors play into the valuation will vary due to industry, business size, profits, history, etc.

8. What is value? Fair Market Value Strategic Value
The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. (§ (b)).
Strategic Value
Measures the price that a specific willing buyer will pay a specific willing seller, based on an expectation of benefits that will inure to the buyer beyond that which an average hypothetical buyer would enjoy.

9. Valuation Methodology
Asset approach
Income-based or capitalization approach
Market Data approach

10. Reviewing a Business Valuation
Consider:
What is the date of the valuation?
What is the standard of value?
What valuation method did the appraiser use?
Is the forecasted cash flow reasonable?
Do the capitalization methods seem reasonable?
Are the companies chosen for the comparison analysis reasonable based on your client’s business?

11. Exit Options “Outside” Sale “Insider” Sale Alternatives Competitor
Third-party
“Insider” Sale
Management Buy-out (MBO)
Employee Stock Ownership Plan (ESOP)
Alternatives
Buy-sell agreement

12. Family Transfer Sale vs. Gift Sale Gift
Sale to children might encourage them to be more financially invested in the success of the business
Can they afford it?
Gift
Client can take advantage of a structured gifting program if started early enough
Benefit of large life-time gift exclusion

13. Family Transfer Options
Family Limited Partnership
Family LLC
GRAT/GRUT
Intentionally Defective Grantor Trust (IDGT)
Charitable Remainder Trust (CRT)
Other option: Self Cancelling Installment Note
Non-family, non-sale option?
Gift of the business to a charity.

14. If your client choses to sell... how should the sale be structured?
Option 1:
Standard sale of entire business
Other options include:
Sale of stock
Sale of assets
Installment sale
Seller financing

15. Post-sale income options for your client...
Ownership or rental contracts
Deferred compensation contracts
Consulting contracts
Keep real estate, lease to new owner

16. Considering the Untimely Exit (Before it happens...)
Death
Disability
Your initial meetings with your client should include:
An estate plan!
Insurance policies!
An “interim” management plan!
What about the non-owner spouse?

17. Tax Considerations Income tax Gift Tax Estate Tax
Generation-Skipping Transfer Tax
Sales/Transfer Tax
Capital Gains
Bonus Tax

18. New IRC §2701 and § 2704 Regulations
Three major areas of new and revised rules:
Transfer within three years rule – similar to § 2036
New “bright line” rule applies to all transfers within 3 years of death – and no apparent exception for transfers for adequate and full consideration.
State-imposed “applicable restrictions”
Where limitations on liquidating an interest in a family entity may be imposed under state law (but can be overridden by agreement of the family) the state law restriction will be ignored for valuation purposes.
“Disregarded restrictions”
Also concerned with liquidation - these rules go beyond the holder’s ability to liquidate the interest by considering value of what the holder would receive if they did liquidate their interest.
For a more detailed look at the proposed regulations, see:
1. Internal Revenue Bulletin: REG–163113–02. September 6, 2016.
2. Steve R. Akers’s article, “Section 2704 Proposed Regulations: Section 2704 Proposed Regulation’s Impose Far-Reaching Limitations on Valuation Discounts for Transfers of Interests in Family-Controlled Entities,” October,

19. Common Pitfalls of Succession & Exit Planning
A sale/transfer of the business before the owner is financial ready
A transfer to children who are not capable of taking control of the business
Missing out on annual or lifetime gifting opportunities
Failing to document the terms of any agreement in writing
Equal share issues (among children)
Valuation Issues

20. Planning pitfalls, continued...
Failing to plan further into the future (multiple generations)
Failing to keep succession plans current

21. Planning for Future Generations
The statistics are staggering:
Only 30% of family businesses successfully pass to the 2nd generation...
12% to the 3rd generation...
3% to the 4th generation.
What should we, as planners and practitioners be doing to make sure our client’s succession plan succeeds?