The Planning Process: Business Owner Planning

Tell us your situation and we'll help you develop clear and understandable solutions. Feel free to contact us regarding any of your concerns. We can assist with your business, investment and insurance needs, including the following:

Buy-sell agreements
Gifts of corporate stock
Life insurance
Private annuities
Self-canceling installment notes
Family limited partnerships
Management control

Buy-sell agreements

A buy-sell agreement is a contract between two or more business owners that outlines the terms of ownership transfer in the event that an owner retires, divorces, becomes disabled or dies. Provisions in any buy-sell agreement also should address the possibility of bankruptcy or loss of a professional license and should be based on a mutually agreed upon market value of the business. Corporate buy-sell agreements are usually structured in one of three ways: stock redemption, cross purchase or a "wait and see" agreement.

  • Stock redemption occurs when the corporation buys back stock from the shareholder or a deceased shareholder's estate.
  • Cross purchase agreements call for the remaining shareholders to buy the stock of the departing or deceased shareholder.
  • "Wait and see" is a hybrid agreement designed to give individuals the flexibility to determine an appropriate buy-sell plan - given tax laws, the market environment, business and family situations - at the exact moment needed.

Gifts of corporate stock

Making a lifetime gift is often the most effective way to reduce estate taxation. It is common practice for a financial plan to include a model of the asset base and cash flow requirements of the donor before making significant gifts. Gifts can be made outright or in a trust. The basic benefits of gifting include:

  • Shifting the income and growth of an asset out of a higher income tax bracket.
  • Tax leveraging.
  • Allowing a "testing ground" for future management skills.

Life insurance

Life insurance offers a practical and popular planning tool because of its premiums relative to policy proceeds and its estate liquidity. Proceeds can be subject to estate tax, however, so it's a good idea that the life insurance be owned outside of the estate to avoid inclusion of the proceeds for tax purposes. Placing life insurance in an irrevocable trust or ownership by adult children are two solutions to accomplish this.

Private annuities

Private annuities are ideally suited for family situations where a parent wishes to transfer an asset such as a business interest to the next generation free of estate taxes. Typically the parent sells the asset to the child, who in return promises to pay the parent an income for life. This is a legally enforceable contract right, but is not secured.

To be successful, the present value of the annuity payments have to be equal to the fair market value of the asset being sold. The child takes the risk that the parent lives past the life expectancy; the parent takes the risk that the child will not meet the current payment schedule.

Self-canceling installment notes (SCIN)

A SCIN is an installment debt obligation that by its terms is extinguished at the death of the seller. It is similar to a private annuity in that an asset is sold on an installment basis. However, with a SCIN, the installments are usually shorter than the seller's life expectancy. The buyer (child) usually pays a "risk premium" in the form of an above-market interest rate to the seller (parent) as a consideration for the cancellation provision. Generally, nothing will be included in the seller's gross estate, but any deferred gain on the installment obligation will be reported for income tax purposes.

In addition, management may not be able to react quickly in situations that require shareholder or board approval. Finally, the initial cost of registration and continuing compliance can be high - including reporting requirements, board of director and shareholder meetings, proxy solicitations and investor and financial community relations.

Family partnerships

A family partnership may be used to shift both the income tax burden and the appreciation of assets from parents to children or other family members. It is possible to transfer business interests to children and maintain control by retaining the general partnership interest. You can receive a discount, for gift tax valuation purposes, if the partnership interest transferred is a minority interest. Discounts also can apply due to the lack of marketability of partnerships. Any appreciation on transferred interests should not be included in the transferor's estate, assuming a valid partnership has been established.

Management control

You may wish to transfer the equity of your company to family members by gift, bequest or sale, yet still be uncomfortable with the new shareholder's business insight. In that case, consider one of the following solutions:

  • Voting agreements are one of the easiest and least expensive techniques to retain management control. Business matters are put to a shareholder vote and decisions are based on a pre-determined scope of the voting agreement.
  • A proxy is written authority given by a shareholder to another person to vote on shareholder matters. Typically, a proxy statement is for management to vote the shares of shareholders unable to attend a specific meeting, but the scope of proxy authority doesn't have to be limited to that alone.
  • Voting trusts are used when voting parties agree to surrender their stock to trustees who represent the parties to vote the stock. Often shareholders receive a trust certificate as evidence of their beneficial ownership of stock held by the trust. The voting trust agreement is usually more difficult to break than a simple voting agreement and can be designed to give trustees full discretion on voting the stock or to be more restrictive.

In addition, management may not be able to react quickly in situations that require shareholder or board approval. Finally, the initial cost of registration and continuing compliance can be high — including reporting requirements, board of director and shareholder meetings, proxy solicitations and investor and financial community relations.

Our Location

David R. Henze

101 Plaza East Boulevard, Suite 116
Evansville, IN 47715
ph: 812.473.7200
David.Henze@LFG.com

Latest News

Financial and Economic Brief - January 1, 2022

• How the Money Supply is Looking as we Turn Over the Calendar – The threat of ongoing inflation may be a result of the US Government and supply chain shortages.

• Shifts in the Paper and Pulp Industry Target 2022 as a Banner Year – The printing industry has been virtually decimated by technology in the form of email & downloadable brochures.

• 5 Steps You Need to Take If Planning to Retire in 2022 – Once you make the decision to retire there are several very important steps that potential retirees should consider.

Financial and Economic Brief - December 1, 2021

• Projected Growth for the US Economy in 2022 – Many economic pundits provide annual projections for the coming year.

• Are the Oil Companies Making Huge Profits While Americans Feel the Pain at the Pump? – Ask friends, family and neighbors about how much it is costing them to fill-up that SUV at the petrol station.

• The New IRA Contribution Rates Are Out for 2022; You’ll Be Happy to Know There Are Many Increases – The IRS has recently released the new IRA contribution rates and limits.

Financial and Economic Brief - November 1, 2021

• Current Status of Electric Vehicles in the US – In spite of the hype that seems to permeate around electric vehicles in the US, the current numbers are less stellar than one might think.

• The Rising Costs of Everything – What We Need and What We Love – Economists are raising an alarming inflation scenario that America has rarely seen before.

• The Economic Outlook for the Chinese Economy – After decades of double digit growth in GDP, the Chinese economy is beginning to show signs of slower growth.

Financial and Economic Brief - October 1, 2021

• Is the Rising Price of Oil a Reflection of Higher Demand? – Even with some pundits pushing the “Green New Deal”, consumers are still loving gas powered vehicles.

• The Revolution of Fast Food Restaurants using Robotics and AI is Upon Us! – The dilemma the fast food industry faces is the inability to hire enough for food prep. & clean-up even with a min. wage of $15/hr.

• The Fed May Now be Poised to Raise Interest Rates – We should think twice when trying to guess what the Fed will do with interest rates in 2022 & 2023.

Financial and Economic Brief - September 1, 2021

• A $3.5 Trillion Budget Spending Bill - PASSED the House – The House has narrowly passed a huge budget while also cementing in a date to pass a $1.5 trillion infrastructure bill.

• What is the Future of the Pharmaceutical Industry? – The worldwide value of the pharmaceutical is approximately $1.2 Trillion.

• 2021 Year-end Tax Strategy – Get a jump on filing your income taxes as early as possible this year since there have been many tax changes resulting from new tax legislation.

Financial and Economic Brief - August 1, 2021

• 2021 Q3 – The latest Economic Forecast? – Some economists and other pundits are forecasting a robust Q3 and Q4 for 2021.

• “For the 99.5% Act” strategically introduced by Senator Bernie Sanders – Recent legislation proposed by Senator Bernie Sanders will severely impede the estate planning efforts of many Americans.

• The E-Vehicle Revolution – When the Internet started, many didn't believe it would have unprecedented influence that took place over such a short period of time.

Request Information

Please let us know how we can serve you.