Read more about the article What Should I Do Now for a Successful Business Succession? – Annapolis and Towson Estate Planning
Main types of business formations including Sole proprietorship, S-corp, partnership, LLC and Incorporations, represented by building blocks.

What Should I Do Now for a Successful Business Succession? – Annapolis and Towson Estate Planning

According to the Conway Center for Family Business, family businesses account for 64% of the U.S. Gross Domestic Product (GDP), yet 57% of those businesses have no formal succession plan.

Twin Cities Business’s recent article, “Don’t Wait for the Future,” notes that many businesses are founded on a high degree of personal trust and loyalty, often a simple handshake agreement. However, these informal agreements aren’t enough to protect you against disagreements and damaged relationships, which can be costly. A lack of business succession planning can negatively impact business owners, as well as their heirs and employees.

There are two key reasons business owners should think about a business succession structure sooner rather than later. One is taxes. Under the current laws, the estate tax exemption is scheduled to sunset in 2025. This leaves business owners with a small window to take advantage of the planning opportunities around this exemption. Second, the absence of a succession structure may result in business disruption at a very emotional time for owners and employees.

The reason why so many business owners are unprepared is that many of them find it uncomfortable or daunting to discuss succession planning or enacting formal agreements. Others don’t truly see the importance of such discussions. And, in other cases, it can be seen as a sign of disloyalty.

The good news is that partnerships can be strengthened if you address this process the right way, with respect for everyone’s point of view and a willingness to listen. The result will be that you’re totally confident that everyone’s interests are secured. This lets you focus on your business, instead of being distracted by unspoken concerns.

Formal contingency plans help business partners clarify their vision for the future. Many are so busy with personal lives, families, and work that they frequently fail to consider the impact of events outside their control. However, these conversations help us think clearly about what we want in the future and what it will take to get there.

If the process is handled correctly, guided by an experienced attorney, the result should be peace of mind and a higher degree of protection for partners and their families.

Contact us to speak to one of our experienced estate planning attorneys.

Reference:  Twin Cities Business (April 10, 2023) “Don’t Wait for the Future”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article How Estate Planning Transfers Business Interest with Limited Liability Companies – Annapolis and Towson Estate Planning
Limited Liability Company on the sticky notes with bokeh background

How Estate Planning Transfers Business Interest with Limited Liability Companies – Annapolis and Towson Estate Planning

Limited liability companies, or LLCs, are used in estate planning to achieve estate tax savings and consolidate asset management, according to a recent article, “Estate Planning With Limited Liability Companies: Transfers of Business Interests as a Planning Opportunity,” from The National Law Review.

In many cases, the LLC is used as a business entity to facilitate gifting or transfers to children, often at discounted values, reducing the value of the donor’s assets, ultimately subject to gift and estate taxation. There are also non-tax benefits, as a properly structured LLC insulates owners from liability and provides an organizational control mechanism.

As a “manager-managed” entity, the management functions and authority over the LLC rests in designated or elected managers, as opposed to owners, also known as “members.” Separating management from ownership transfers some of the asset’s economic benefits, while retaining control over operations. Limiting managerial or voting rights also justifies using valuation discounts for the membership interests who lack control over the company, presenting a tax-planning opportunity.

An LLC offers several benefits:

  • A streamlined method of transferring ownership
  • Creating a structure for centralized management, control, and succession
  • Preserving family ownership through rights of purchase and first refusal
  • Establishing procedures to resolve internal family disputes
  • Gaining protection of LLC assets from claims asserted against owners
  • Gaining protection of owner assets from claims asserted against the LLC

Significant tax savings can be achieved through lifetime gifts of LLC interests because of valuation discounting and removing future appreciation from the donor’s estate. In addition, if transfers are made to trusts for the children, it may be possible to achieve even further benefits, including increased protection against lawsuits, dissolving marriages, and future estate taxes.

These are complex transactions requiring the knowledge of an experienced estate planning attorney and careful vetting by tax advisors. One downside to lifetime gifting: unlike assets passing as part of an estate, gifted assets do not receive a basis adjustment for income tax purposes at the time of the donor’s death. Another downside is that the donor generally cannot benefit economically from the assets after they are transferred. However, if the donor is concerned about divesting themselves of the transferred assets and the income, the transfer could be structured as a sale rather than a gift to provide increased cash flow back to the transferor.

A final note: if the LLC is not operated consistently with the entity’s non-tax business purposes, it may be vulnerable to attack by the IRS or third parties, undermining its benefits for estate tax planning and limited liability protection. The entity must be managed to support its valid business purpose as a legitimate enterprise.

Questions? Contact us to speak to an experienced estate planning attorney.

Reference: The National Law Review (May 19, 2023) “Estate Planning With Limited Liability Companies: Transfers of Business Interests as a Planning Opportunity”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What Do Your Kids Want to Inherit? – Annapolis and Towson Estate Planning

What Do Your Kids Want to Inherit? – Annapolis and Towson Estate Planning

Nearly everyone needs a will, also known as a last will and testament, to list all properties and assets and how they should be distributed postmortem. While the decisions are all yours, it’s helpful to know what personal possessions your children may or may not want to receive as part of their inheritance, as explained in the article “12 Things Your Kids Actually Might Want to Inherit” from Entrepreneur.

Making a list of things you want your children to inherit will save a lot of time, especially if you have a lot of possessions you want to give to them. You might think they want your collection of fine china and glassware, silverware and Grandma Helen’s sculptures. However, you might be wrong.

Wanting your children to have these items so they stay in the family isn’t wrong. However, it’s more than likely they’ll be donated after you die. If you want to make your children’s lives a little easier, here are twelve things they actually might want:

Cash money. Cash is the ideal asset, since it can be easily divided. Cash also provides an easy way to give your children a chance to invest in stocks or real estate or a means of starting a business.

Annuities. An inherited annuity has several advantages, including tax benefits, especially if they are non-qualified annuities paid for with after-tax dollars. By annuitizing an annuity, heirs may convert it into a steady and dependable income stream to help cover living expenses. They can choose to do this for a pre-defined period of time or for life, if the original annuity contract was created as a multi-life annuity.

Recipes. There are any number of ways to create a cookbook, from a simple bound folder to a hard-cover book likely to be shared and talked about, bringing warm memories to all.

Family Photos. Whether you take the time to organize them or not, videos and photos are your family’s history. Keep them in a water-proof bin and protect them for the future generations, until you’re ready to hand them over.

Trusts. Trusts are not just for wealthy people. Trusts are an all-purpose tool for passing assets across generations, controlling how they are used and minimizing estate tax liability. A trust is a legal entity to hold a variety of assets. A trust allows you to set down what you want done with the money, from paying for college to buying a first home. You name a trustee who is in charge of managing the trust and making sure your wishes are followed.

Furniture. Today’s young adult is more likely to want authentic furniture with family history than the latest knockdown furniture from Ikea. They also know how expensive good furniture is and may welcome saving money when furnishing their first home.

Vinyl Records. While collectors may value pristine records, the albums you listened to with scratches and skips will be prized by younger listeners. They evoke happy memories and hold sentimental value.

Life Insurance. If you want to leave money for your family but worry about the impact of taxes, life insurance is a good option. Your estate planning attorney will be able to explain who the beneficiary should be, or if you need to set up a trust to benefit your children.

Real Estate. Real estate is a strong investment with a track record of growth. Keeping a vacation home in the family for future generations requires extra planning. For many families, even a simple cabin by the lake is a touchstone of family history.

A Business. Family-owned businesses are often passed to the next generation. An established business has value up front and, if all is well with the business, provides income. A succession plan will be needed. Be realistic: if your children have never set foot in your office or expressed interest in the business, selling it may be a better move.

Investment Accounts. Stocks, bonds or other investment accounts can be gifted to children while you are living or after you die. Like cash, this asset is easily divided and relatively easy to give.

Education Funds. You can start a College Savings Account 529 for individual children when they are born or open one at any time to help with college expenses. Having financial help for college could be the difference between the burden of college loans or being able to explore different careers without the constant worry that a six-figure debt brings.

Contact us to speak with one of our estate planning attorneys and explore all of the different ways to transfer wealth to the next generation while you are living and after you pass.

Reference: Entrepreneur (Oct. 30, 2022) “12 Things Your Kids Actually Might Want to Inherit”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Is Your Business Included in Estate Plan? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “The Importance of Estate Planning When Building Your Business” says that every business that’s expected to survive must have a clear answer to this question. The plan needs to be shared with the current owners and management as well as the future owners.

The common things business owners use to put some protection in place are buy-sell agreements, key-person insurance and a succession plan. These are used to make certain that, when the time comes, there’s both certainty around what needs to happen, as well as the funding to make sure that it happens.

If your estate plan hasn’t considered your business interests or hasn’t been updated as the business has developed, it may be that this plan falls apart when it matters the most.

Buy-sell insurance policies that don’t state the current business values could result in your interests being sold far below fair value or may see the interests being bought by an external party that threatens the business itself.

If your agreements are not in place, or are challenged by the IRS, your estate may find itself with a far greater burden than anticipated.

Your estate plan should be reviewed regularly to account for changes in your situation, the value of your assets, the status of your (intended) beneficiaries and new tax laws and regulations.

There are a range of thresholds, exemptions and rules that apply. Adapting the plan to make best use of these given your current situation is well worth the effort. Contact us to talk to one of our experienced estate planning attorneys about your plan.

Including your estate planning as part of your general financial planning and management will frequently provide a valuable guidance in terms of how best to set up and manage your broader financial affairs.

Financial awareness can not only inform how you grow your wealth now but also ensure that it gets passed on effectively. The same is also true of your business.

A tough conversation about what happens in these situations can be a reminder to management that over dependence on any key person is not something to take for granted.

Reference: Forbes (Sep. July 12, 2019) “The Importance of Estate Planning When Building Your Business”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Does a Business Owner Create an Exit Strategy? – Annapolis and Towson Estate Planning

Letting go of a business is not easy, says a recent article titled “Estate Planning Strategies for Business Owners Planning an Exit” from CEOWorld Magazine. Where the exit is to sell the business or retire, or the result of an unexpected events, its crucial to have an estate and succession plan.

When should you establish a plan? It should be early, perhaps even when you become a CEO. A long-term strategy is as important as short-term decisions. Not having an estate plan could mean your interest in the business goes through probate, which is both public and time consuming. The business may never recover from the distribution of assets and the exposure. No estate plan also means missed changes to leverage discount gifting or any other tax-reduction strategies.

Consider the following when talking with your estate planning attorney:

What is the exit strategy—to sell, be acquired or merged, have a family member take over, or sell to key employees?

How much money to do you need and want at the exit? Do you want to create a stream of income or a lump sum?

Do you have a charitable giving plan to reap tax advantages and support an organization with meaning to you? Structuring a gift far in advance avoids using a reduced fair market value and have it deemed as a cash gift.

Transferring the business to family members instead of selling to outside parties creates many different planning opportunities. With family members, emotions come into play, even though this is not always productive. If some offspring are not involved in the business, will they receive a share of the business? Do you want to equalize your inheritance? Assets can be divided by the use of trusts, for example.

You will want to work with an estate planning attorney with experience in creating a succession plan with a tax model. This is often overlooked in succession planning and can cause significant cash flow management issues as well as lost tax benefits.

Determine if you want to make gifts using business interests or sales proceeds early on and whether these gifts will go to family members or charities. The earlier the planning occurs, the more you can maximize the income and estate tax benefits.

Clarify your own retirement needs and goals. Business owners often fail to correctly calculate the expected investment income on after-tax proceeds from the sale of the business. Will it be sustainable enough for the lifestyle you want in retirement? If not, is there a way to structure the sale of the business to achieve your financial goal?

It’s never too late to plan for an exit strategy, and the earlier the planning, the higher the likelihood of a successful transition.  Please contact us to schedule a time to speak with one of our experienced estate planning attorneys to develop an exit strategy and successful transition for your business.

Reference: CEOWorld Magazine (Aug. 16, 2022) “Estate Planning Strategies for Business Owners Planning an Exit”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Happens If Couple Divorce and Own Business? – Annapolis and Towson Estate Planning

High-profile cases like the Bezos or the Gates should cause many people to consider how their business and marital assets are tied together. You need to have plans in place from the beginning. No one thinks their partnership will end. However, it’s necessary to have a plan or prenuptial agreement in place, just in case.

The Dallas Business Journal’s recent article entitled “Does your business need a prenup?” explains that there are three typical outcomes when married couples working as business partners decide to end their relationship:

  • One individual buys out the other partner’s shares and continues running the business;
  • The partners sell the business and divide the proceeds; or
  • The couple continues working as partners after the divorce.

Safeguards can be put in place on the first day of the relationship to protect your personal and business assets in the event of a divorce. A way to do this is through a prenuptial agreement, which states what will happen if a split happens. A pre-nup should:

  • Establish the value of the business as of the date of marriage or the date the agreement is signed;
  • Detail a course of action with the appreciation or depreciation of the business from the date of the marriage;
  • Say how business value will be measured; and
  • Specify the allocation of business interests to be awarded to each spouse in the event of a divorce.

In addition to a prenuptial agreement, any privately held company should have a shareholder agreement (or “operating agreement” for non-corporations). The shareholder agreement is one of the most important documents owners of a closely held business will ever sign.

It controls the transfer of ownership when certain events occur, like divorce and states the following:

  • Which party will buy out the other’s shares of the company if a buyout occurs; or
  • If either party has the right to sell, how the ownership interest will be valued and the terms and conditions concerning the acquisition.

Because there are some tax implications involved in a buyout, it’s best to bring in experienced estate planning attorney for this process. In addition, life events like divorce or changes in a business partnership are an appropriate time to update your will, estate plans and any necessary insurance policies.

Please contact our office to schedule a call with one of our attorneys.

Reference: Dallas Business Journal (Aug. 1, 2022) “Does your business need a prenup?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What’s the Most Important Step in Farm Succession? – Annapolis and Towson Estate Planning

There are countless horror stories about grandchildren in tears, as they watch family farmland auctioned off because their grandparents had to liquidate assets to satisfy the taxes.

Another tale is siblings who were once in business together and now do not talk to each other after one felt slighted because they did not receive the family’s antique tractor.

Ag Web’s recent article entitled “Who Gets What? Take This Important Estate Planning Step” says that no matter where you are in the process, you can always take another step.

First, decide what you are going to do with your assets. Each farmer operating today needs to be considering what happens, if he or she passes away tonight. Think about what would happen to your spouse or your children, and who will manage the operation.

The asset part is important because you can assign heirs to each or a plan to sell them. From a management perspective, farmers should then reflect on the wishes of your potential heirs.

Children who grew up on the farm will no longer have an interest in it. That is because they are successful in business in the city, or they just do not have an interest or the management ability to continue the operation.

After a farmer takes an honest assessment, he or she can look at several options, such as renting out the farmland or enlisting the service of a farmland management company.

Just remember to work out that first decision: What happens to the farm if I am dead?

Once you work with an experienced estate planning attorney to create this basic framework, make a habit of reviewing it regularly.

You should, at a minimum, review the plan every two to three years and make changes based on tax or circumstance changes.

Reference: Ag Web (August 1, 2022) “Who Gets What? Take This Important Estate Planning Step”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Is the Best Asset Protection? – Annapolis and Towson Estate Planning

Everyone should have an estate plan incorporating asset protection and tax planning. Most people do not realize they live with a certain level of risk, and it can be addressed in their estate plan, says an article from Forbes titled “You Need An Asset Protection Plan Not Just A Will.”

Being aware of these issues and knowing that they need to be addressed is step one. Here is an illustration: a married couple in their 50s have two teenage children. They are diligent people and made sure to have an estate plan created early in their marriage. It has been updated over the years, adding guardians when their children were born and making changes as needed. They have worked hard and also have been fortunate. They own a vacation home they rent most of the year and a small retail business and both of their teenage children drive cars. They do not see a reason to tie asset protection and risk management into their estate plan. No one they know has ever been sued.

With assets in excess of $4 million and annual income of $350,000, they are a risk target. If one of their children were in an auto accident, they might be liable for any damages, especially if they own the cars the children drive.

The vacation home, if not held in a Limited Liability Company (LLC) or another type of entity, could lead to exposure risks too. If the property is not insured as an income-producing business property and something occurs on the property, the insurance company could easily refuse the claim if the house is insured as a residence.

If their retail business is owned by an LLC or another properly prepared entity, they have personal protection. However, if they have not followed the laws of their state for a business, they might lose the protection of the business structure.

Retirement assets also need to be protected. If they have employees and a retirement plan and are not adhering strictly to all of the requirements, their retirement plan qualification could easily be placed in jeopardy. Their estate planning attorney should be asked to review the pension plan and how it is being administered to ensure that their retirement is not at risk.

There are several reasons why tax oriented trusts would make a lot of sense for this couple. While current gift estate and GST (Generation Skipping Tax) exemptions are historically high right now, they won’t be forever.

This couple would be well-advised to speak with their estate planning attorney about the use of trusts, to serve several distinct functions. Trusts can shelter assets from litigation, decrease or minimize estate taxes when the estate tax changes in 2026 and possibly protect life insurance policies.

Estate planning and risk management are not only for people with mansions and global businesses. Regular people, business owners and wage earners in all tax brackets need an estate plan to address their legacy, protect their assets and defend their estate against risks.

Reference: Forbes (June 7, 2022) “You Need An Asset Protection Plan Not Just A Will”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Is Succession Planning Necessary for Family Business Entities? – Annapolis and Towson Estate Planning

Failing to have a succession plan is often the reason family businesses do not survive across the generations. Creating, designing and implementing a succession plan can protect the family’s legacy, according to the article “Planning for Success: How to Create a Suggestion Plan” from Westchester & Fairfield County Business Journals.

Start by establishing a vision for the future of the business and the family. What are the goals for the founder’s retirement? Will the business need to be sold to fund their retirement? One of the big questions concerns cash flow—do the founders need the business to operate to provide ongoing financial support?

Next, lay the groundwork regarding next generation management and the personal and professional goals of the various family members.

Several options for a successful exit plan include:

  • Family succession—Transferring the business to family members
  • Internal succession—Selling or transferring the business to one or more key employees or co-workers or selling the company to employees using an Employee Stock Ownership Plan (ESOP)
  • External succession—Selling the business to an outside third party, engaging in an Initial Public Offering (IPO), a strategic merger or investment by an outside party.

Once a succession exit path is selected, the family needs to identify successors and identify active and non-active roles and responsibilities for family members. Decisions need to be made about how to manage the company going forward.

Tax planning should be a part of the succession plan, which needs to be aligned with the founding member’s estate plan. How the business is structured and how it is to be transferred could either save the family from an onerous tax burden or generate a tax liability so large, as to shut the company down.

Many owners are busy with the day-to-day operations of the business and neglect to do any succession planning. Alternatively, a hastily created plan skipping goal setting or ignoring professional advice occurs. The results are bad either way: losing control over a business, having to sell the business for less than its true value or being subject to excessive taxes.

Every privately held, family-owned business should have a plan in place to establish what will happen if the owners die or become incapacitated.

An estate planning attorney who has experience working with business owners will be able to guide the creation of a succession plan and ensure that it works to complement the owner’s estate plan. With the right guidance, the business owner can work with their team of professional advisors to ensure that the business continues over the generations.

Reference: Westchester & Fairfield County Business Journals (March 31, 2022) “Planning for Success: How to Create a Suggestion Plan”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Should Small Business Owners Know about Estate Planning? – Annapolis and Towson Estate Planning

Not having an estate plan can place business owners and entrepreneurs in jeopardy because they may face difficulties in keeping the business running, if they have to withdraw from the business at any point in time.

Legal Reader’s recent article entitled “What Small Business Owners Should Know about Doing Estate Planning” explains that estate planning is necessary to ensure business continuity. Think about who can take control when you are no longer around to have the business continue according to your wishes contained in your estate plan. An experienced estate planning attorney can help business owners create a comprehensive estate plan, so things do not become chaotic for their family in the event of premature death or any permanent disability. Consider these steps when it comes to good estate planning for business owners.

Create an estate plan if you have not got one. A will is designed to detail your wishes about how you want the business to run and the manner of sharing your property at your death. A power of attorney allows an entrusted individual to undertake your business transactions and manage your finances, if you are incapacitated by injury or illness. A healthcare directive permits a trusted agent to make medical decisions on your behalf when you cannot do so yourself.

Plan for taxes. Tax planning is a major component of estate planning. Our tax laws keep changing frequently, so you have to stay in constant touch with your attorney to develop strategies for decreasing your tax liability, as well as creating a strategy for minimizing inheritance/estate taxes.

Buy life and disability insurance. Small business owners should think about purchasing life insurance, so their families can have a source of income after their death.

Create a succession plan. In addition to estate planning, a business owner should have a succession plan that specifies exactly how your company, and your family will prepare for a transition of ownership. The purpose of a well thought out succession plan is to keep the business operating or to take steps to sell it. This plan also includes the organizational structure of the business in case of maintaining business continuity.

Finally, you should keep everyone impacted by your decisions apprised of your estate plan and your business succession plan.

Reference: Legal Reader (Aug. 26, 2021) “What Small Business Owners Should Know about Doing Estate Planning”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys