Succession Planning for the Business Owner, Buy/Sell Agreements, Discounts, Estate Taxes

Buy/Sell Agreements, Discounts, Estate Taxes

Succession Planning for the Business Owner

Patrick D. Coen, Partner
Zanck, Coen, Wright & Saladin PC

Patrick D. Coen PC: There is another means of transferring the ownership and those are through buy/sell agreements or redemption agreements.

Those are agreements that oftentimes uses insurance to help fund the bottom line. But a buy/sell agreement or redemption agreement is literally an agreement amongst the shareholders of the company that if a certain event happens; death, disability, retirement, the remaining shareholders are then to buyout the leaving shareholder. And that may be over time in other words payment could be paid over a three-year, four-year, 10 year period or it could be done with a lump sum depending on whether the value of the business is within reach and whether you’ve got products such as life insurance in order to fund it.

There has been a vehicle that has been used by estate planners for the last decade which is to, in order to pass that asset onto those you wish to have received it, some companies are using these redemption agreements or buy/sell agreements and applying a discount factor to them because if the successor shareholders own less than a majority or the selling shareholder owns less than a majority, the current practice is to use discount factors for lack of marketability and lack of control and thereby discount the value of the asset in order to pass that asset on to those who you want it to go to.

The reason those discounts are important is because right now the federal estate tax law provides that the first $5.45 million is estate tax free but after that there is a substantial tax.

As a result of that if you have a successful business that is worth more than the $5.45 million you run into the estate tax issue and obviously reducing the estate tax which starts at over 40% is a major estate planning goal. And again, is involved with a succession planning because if you are going to have to pay those estate taxes that’s less money available for your loved ones and likewise less money available for the business which obviously needs its own working capital.

So the use of these discounts for marketability and lack of control have been standard business planning for many years. And just this past month the IRS has announced a new regulation that he very well may end the use of these discount factors.

So as a business planner it’s back to the drawing board if that event hasn’t happened and part of your plan was to use the discounts, you are going to have to revise or reanalyze those factors and look to some other means in order to try to get to the asset to those you want it to go to with the least amount of federal estate tax payable.