Connelly vs United States and Succession Planning

The recent Connelly v. United States Supreme Court decision provides critical insight for closely held business owners considering succession planning and tax implications.

The Court's ruling clarifies that life insurance proceeds owned by a corporation, even if intended for share repurchase agreements, increase the corporation's value for estate tax purposes. This decision impacts business owners who use corporate-owned life insurance as part of their succession planning, as it reaffirms that the company's obligations to redeem shares do not reduce the company's valuation in terms of tax liability.

Key Takeaways from Connelly v. United States

1. Business Value Impact: Life insurance proceeds payable to the corporation increase the corporation's valuation, which affects the value of shares for estate tax calculations. In Connelly's case, the $3 million policy proceeds were added to the company's value upon Michael's death, which led to a substantial tax bill.

2. Planning Options: The Court suggested alternative structures, like a cross-purchase agreement where individual shareholders own policies on each other. This setup may avoid increasing the corporation's value upon a shareholder's death, potentially reducing estate tax exposure.

3. Professional Advisory Importance: This case underscores the value of consulting with tax professionals, insurance experts, and succession planners to design strategies that align with tax laws, which can help mitigate unexpected financial consequences.

Practical Steps for Business Owners

• Coordinate with your Advisory Team: Using a coordinated approach with legal, tax, and insurance professionals can ensure strategies align with tax regulations, reducing the risk of unintended tax liabilities.

• Consider Cross-Purchase Agreements: Cross-purchase agreements may provide tax advantages over corporate-owned life insurance policies for some businesses.

Connelly v. United States offers a valuable lesson in how business structure and tax planning interact. Proactively structuring ownership transitions could avoid similar tax outcomes, enabling smoother family business successions and a more straightforward path for future growth.

Contact us today for assistance in reviewing your current agreement: 301-859-0860 | email@ennislp.com.

Transfer of Ownership to a Business-Active Child

All business owners will need to answer these three questions at some point:

1. What is my desired date of departure or exit?

2. How much $$$$ will I need for my goals and for life after the business?

3. To whom will I sell my business?

For many business owners, the preferred answer to the third question is a sale or transfer to my child, or children, that are active in the business. In such cases, the owner would have legacy or values-based goals that would be realized with a transfer of the business to their children. And, it’s not uncommon for these goals to be as important to the owner as their financial goals.

First steps in deciding if this is your best option for exit would include the following:

• Does my child want to be an owner? It can be surprising for an owner to discover that their business-active child has no desire to own “the family business”.

• Is my child capable or have the temperament for business ownership? Owning a business is quite different than having even a significant leadership role in the business. And, as parents, we can be very generous in the evaluation of our children so it is wise to obtain an expert assessment.

• Should my child pay for the business interest? Would I want them to pay for all or some of the business? Do I want them to experience the financial challenges that often occur in the early years of owning a business?

• Is minimizing the overall estate, gift, and income tax burden important to me?

• Am I concerned about the “fair distribution” of my entire estate to all my children including those not active in the business?

• How soon do I want to transfer meaningful ownership interest to my business-active child?

• Quantify available assets and resources to accomplish financial goals:

  • Estimate the value of the business.

  • Project future net cash flow of business available for planning.

  • Value and income from non-business assets.

  • Calculate any gap between the current value and what will be needed post-exit.

Following are the most common methods for transferring a business interest to a business-active child:

• Sale of stock

• Gift of stock

• Bonus of stock

Each of these methods has advantages and disadvantages, but a good place to start is having your Wealth and Tax Advisors conduct an analysis of the tax consequences of each scenario for your specific situation.

Please contact us if we can be of service to you in helping plan for a transfer of your business to your business-active child. Also, consider investing 15 minutes in our FREE exit readiness assessment.

What is a Certified Business Valuation and When Do I Need One?

A Certified Business Valuation is a comprehensive assessment conducted by a qualified professional to determine the fair market value of a business. It involves a systematic analysis of various factors such as financial statements, industry trends, market conditions, company assets, intellectual property, customer base, and other relevant aspects to estimate the worth of a business.

You may need a Certified Business Valuation in several situations, including:

• Selling or Buying a Business: When you're involved in a business sale or acquisition, a valuation helps determine a fair asking price or offer, ensuring both parties understand the business's value.

• Obtaining Financing: When seeking a loan or financing for your business, lenders often require a valuation to assess the value of the company and its ability to generate cash flow to repay the loan.

• Partnership Dissolution: If you're part of a dissolving business partnership, a valuation is essential to determine the fair value of each partner's share and facilitate a smooth division of assets.

• Estate Planning: Business valuations are necessary when planning for estate taxes or distributing business assets as part of an inheritance. A valuation helps establish the value of the business for tax purposes and ensures a fair distribution among beneficiaries.

• Shareholder Disputes: In case of disagreements among shareholders, a valuation can be conducted to determine the value of shares or ownership interests, aiding in resolving disputes or facilitating a buyout.

• Financial Reporting: Valuations may be required for financial reporting purposes, such as complying with accounting standards or fulfilling regulatory requirements.

• Litigation or Dispute Resolution: During legal proceedings like divorce settlements, bankruptcy, or insurance claims, a certified valuation can provide an objective assessment of the business's value, serving as evidence in court.

It's important to note that the specific circumstances and requirements for a Certified Business Valuation may vary based on jurisdiction and the purpose for which it is being conducted. Consulting with a qualified business valuator or professional accountant can help you determine when and how to obtain a valuation tailored to your needs.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Will You Be As Responsible Exiting Your Business As You Have Been Building It?

One of our clients had built a thriving service business over 20 plus years and was able to exit successfully a couple of years ago.  When we first met to discuss his desire to exit about 5 years ago, we discussed his time frame and financial needs, but also his outside interests such as his basketball outreach to a local underprivileged neighborhood.  Many years ago, very discreetly, he began renting a gym weekly for teenage and college-aged kids in a low-income neighborhood and faithfully ran it at his own expense for years.  He lived life "others-focused" in both his personal and business life and we find that to be true for most successful owners.

Like other successful business owners, our client worked hard for decades withstanding downturns in the economy and persevering through other tough times while managing to build a profitable business.  A business that many people had come to depend on including employees, customers, vendors, suppliers, his family, as well as charities he supported. He had been deeply committed to his responsibility as a business owner, and now realizing all that was at stake, he wanted to be as responsible in how he left the business as he had been in building the business. And, he understood that it would require time and planning if he were to experience the same level of success.

Will you be as responsible in planning your exit as you have been in building the business?  In our client’s case, the business has been sold to insiders and has realized continued prosperity serving all stakeholders, while our client is flourishing in his well-planned and meaningful “life after the business”.

Plan now so that you are as responsible and successful exiting your business as you've been in building it. You can get started today with our free exit assessment. We do not request any confidential information, it requires 15 minutes of your time, and you will receive a 12-page report scoring you in four key planning areas.

email@ennislp.com | 301-859-0860

What Happens When a Sole Proprietor Dies Unexpectedly?

A sole owner of a business who has a spouse and/or family has not a few key planning issues that need to be addressed before it’s too late.  “Too late” is the unexpected event of death or permanent incapacity or disability.  To illustrate, let’s use the following story that is based on real-life events…

John Doe owned a very successful commercial real estate development firm.  He regularly met with his Business Advisor and “game planned” aggressive growth strategies that were proving to be successful in building the value of the business.  To the point where John was seriously considering expansion into other geographic areas.  Life was good and the business was growing rapidly!

One evening after meeting with his advisor, John experienced a sudden heart attack and died later in the hospital.  At age 55 he still had family financial responsibilities, yet he had not been as thorough in his personal and family financial planning as he had been in planning to build the business.  It was a time of extreme grief and mourning as well as uncertainty for Jane…

• She didn’t know what to do next.

• She didn’t know if John’s salary would, or could, continue.

• Employees and customers started to leave as there was no plan, and so the business became less valuable and sellable.  This was problematic as Jane was dependent on the sale value of the business as John had limited life insurance and investable assets.

• Due to the high level of uncertainty, there was a lack of peace and stability for Jane and for everyone who was at all dependent on the business.

There were too many things that John didn’t do, and that should have been done, to mention in a short blog post. So, highlighted here are just a few (not an exhaustive list) of the key planning solutions that, if John had put them in place, would have helped in minimizing the agony that Jane and the family experienced…

• Clear written instructions that were aligned with updated and adequate estate planning documents as to how to continue the business.

• A personal financial plan that included a cash flow analysis of how much money Jane would need both short-term and long-term in the event of John’s early death. 

• A written resolution for Jane to continue to receive John’s salary until insurance proceeds were received.

• Plans for the business bank line of credit to continue uninterrupted.

• A current and adequate personal life insurance program.

• Key person life insurance on John that would have provided needed liquidity for the business to provide key employee stay bonuses, etc.

  Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Will Your Buy-Sell Agreement Solve Problems or Cause Problems?

The most important business planning document that multiple owners of a business can have is a buy-sell agreement.  A buy-sell agreement provides direction to owners and other stakeholders when certain events trigger the transition of an ownership interest in a business. 

These agreements can be very effective in minimizing uncertainty and indecision during challenging and emotional times.  However, it’s not enough to simply have a buy-sell agreement, it needs to be written skillfully to accomplish the desires and goals of the owner(s).

Buy‐sell agreements, in some situations, can create as many questions, problems, and conflicts as they seek to address.  A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time.  Unanswered questions, outdated agreement language that no longer represents the goals of the owner(s), an agreement that is not comprehensive and too simplistic or was poorly implemented can render the buy‐sell agreement ineffective and fail to accomplish the intended purpose.

Opening questions:

• Do you need a buy-sell agreement, and if so, do you have one?

• Is your buy-sell agreement outdated?  When was the last time your agreement was reviewed to ensure that it still well represents your goals? 

• Will your buy-sell agreement cause more problems than it would solve in its current form?

Too often buy-sell agreements have one or more of these planning gaps:

1. Ignores lifetime trigger events such as divorce, bankruptcy, voluntary exit, and involuntary exit.

2. A simple valuation method that does not consider the ever-changing dynamics and growth of the business. 

3. The timing of valuation is not adequately addressed.

4. When buy-sell agreements are not regularly reviewed, they can become outdated and result in unpleasant surprises when they are needed. Owners rely on Buy-Sell Agreements to manage emotional situations, and if those agreements don’t account for changes in their goals as well as the business, they can cause significant problems for everyone involved.

5. Many buy-sell agreements are too simplistic to manage the personal complexities of the individual owners who sign them, and their relationships with each other. For example, companies with multiple owners often don’t want to treat all owners similarly, or one owner subject to the agreement may be uninsurable. In family businesses, non-business considerations may affect the design of buy-sell agreements.

6. Fails to address threats to business continuity.  Most buy-sell agreements don’t address the challenges that the business, surviving owners, and deceased owner’s family will face after an owner exits. Too often they only address the transfer of ownership upon an owner’s death or permanent incapacitation. For example, if the surviving owner does not have enough assets to satisfy the personal guarantees previously made by the deceased owner, once that financing is pulled, the business may not be able to continue. Likewise, if the deceased owner was the company’s rainmaker or COO and no one can step into those roles, the business may be unable to survive.

7. Buy-sell agreements are typically deficient in considering the financial security of the decedent’s family. 

Questions your buy-sell agreement should answer include the following:

• Are “lifetime triggering events” addressed as well as death and disability?  Divorce?  Bankruptcy?  Voluntary exit?  Involuntary exit?

• What type of valuation estimate is required?  Book value?  Fair market value?  Fair value?  Investment value?  Agreed upon value?

• What is the desired timing for the value calculation?  Date of the trigger event?  Subsequent event?

• Does the entire business need to be valued, or a partial ownership interest? 

• What method of funding will be used to complete the transaction?

  • Cash – Requires sufficient cash flow or reserves to pay the full sale price in a lump sum.  May not be available when needed.

  • Loan – Future credit availability and cost of borrowing are factors. 

  • Installment Sale – Requires repayment from earnings and is contingent upon the future growth and success of the business.

  • Insurance – Provide liquidity when needed for either death or disability trigger events.

• Should the buy-sell agreement method of funding be taken into consideration in the value?

• What method will be used for valuation?  Fixed price?  Formal valuation?  Formula-based?

• Is there clarity as to what is mandatory and optional regarding the purchase or sale of an ownership interest?

• What goals for your spouse and family do you want to be realized if you die, become incapacitated, or otherwise exit the business unexpectedly? 

Contact us today to learn more about our STRATEGY RENOVATION® Business Continuity Plan if you need help creating or “renovating” your plan for the unexpected.

Keep The End In Mind

Often business owners are exhorted to build their business with "the end", or their eventual exit in mind.  This can be a good idea in that it lends toward building your business to have "transferable value", or value that someone else will want to buy and own when you're ready to leave.  Value apart from you the owner.

It is also wise to build your exit plan with the end in mind.  The end being, not just your eventual exit from the business, but also your exit from this life.  In other words, creating your business exit plan with your "desired legacy" in mind.  Each of us leaves a legacy, but we don't all leave the legacy that we want to leave.  

We find that when thinking of legacy, business owners often focus on the transition of wealth.  And certainly, the effective distribution of wealth to future generations is a most important consideration.  At the same time, there are other significant and unique factors pertaining to the legacy of a business owner:

• Family peace and harmony

• Provision for family and others

• Sustaining the culture of the business

• Effective transfer of personal and business values to future generations

• Reputation and role of the business in the community | Family name in the community and marketplace

• Continued service to employees, customers, vendors, local economy

• Being prepared for the unexpected

• The way(s) in which the business owner wants to be remembered

This is a limited and representative list of issues and categories for reflection and planning pertaining to the legacy of a business owner.  You may have other priorities and desires.  The point is, in order to leave your desired legacy, it will take reflection, planning, and time to execute the plan.  Get started as soon as possible, as we don't know how long we have to create a plan for our desired legacy.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Living Trusts and Avoiding Probate in Estate Transfer of Your Business

Probate

Probate is the legal process through which property is transferred after a property owner’s death. Generally, the probate process requires the gathering of all assets, paying off debts, and distributing the remaining assets in accordance with the deceased person’s estate plan and the law. The probate process is facilitated by a court-approved, or appointed, a person known as the administrator, executor, or personal representative of the estate.

If a person passes away with a will with assets held in his or her sole name, the estate must go through probate. The court will oversee the distribution of assets according to the terms of the will. As you might imagine and may know from experience, probate can be a tremendous burden and very expensive as the personal representative of the estate deals with the technicalities of the court system. 

Following are some key disadvantages of having an estate go through probate:

·       The time required for probate and administration of the estate

·       The cost of estate administration is significantly increased with an additional cost of probate

·       Court involvement is time-consuming and expensive

·       The probate process is public

Living Trusts and Avoiding Probate

If a business owner’s goals include the stable and uneventful continuance of the business and a peaceful and expedient transfer of ownership in the event of their premature death or permanent incapacity, the owner should, with legal counsel, consider a Living or Revocable Trust as a planning tool in their overall estate plan.  Living Trusts can help in minimizing taxes and legal fees, affording privacy and flexibility, avoiding probate, and making the entire process of business transfer and continuance much easier.  If a business owner passes away with their business titled in the name of the Living Trust, the distribution of assets will go much more smoothly.

With all the positives, there are reasons that a Living Trust may not be the best solution for avoiding probate in the estate distribution of your business.  They include the following:

·      Transferring S-Corporation business interests to certain types of trusts could result in negative tax consequences.

·      Once your business passes to your heir(s), planning steps must be taken to prevent the S-Corporation from reverting to a C-Corporation.

·      Some business interests may lose marketability when transferred to a trust.

·      It could become more challenging to secure bank debt.

·      Depending on the type of trust selected, your interest in the business might be diluted.

·      Transferring interests to a trust could possibly trigger provisions in your buy-sell agreement (if applicable).

In summary, if a smooth and expedient transfer of your business at death or your permanent incapacity is a goal, a Living Trust may be the solution. As with all legal matters, we advise that you seek legal counsel as to the pros and cons and whether it would be a wise strategy for your plans for business continuity and estate distribution.

Invest 12-15 minutes and complete the FREE ExitMap® Assessment and receive a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Thoughts About Family Business Transfers

You might think that a transfer of your business to a child or family member would be the easiest exit route to facilitate. Whereas statistics reveal that only one-third of all family businesses pass successfully to the next generation, and only 10% to the third generation.

Owners considering a transfer to children often run into these obstacles, among others:

• The children not getting along with one another

• The children not interested in the business and with different career goals

• The children don’t have the same skill, ability, or temperament to be a business owner as the parents do

• Fairness in transferring wealth to both children active in the business and non-active

• The children want ownership and control of the business before their parents have achieved their financial goals

• The business is strong and large enough to support a transfer while also providing for the financial goals of the parents

All business transfers are challenging, but family businesses face especially significant challenges. However, with the right pre-planning, the obstacles can often be overcome and a successful transfer can be realized.

Following is a basic set of questions for evaluating whether or not a family business transfer is the best exit route for you and your family:

• How much wealth do want to keep? How much cash will you need post-transfer of the business?

• Do you children desire to be owners? How capable and prepared are your children for ownership?

• Is your business prepared for a successful transfer? Are growth and cash flow steady and increasing? Is the business large enough to support all children (if applicable) financially while providing each with areas of responsibility?

• Are you ready? Financially? Most business owners are unhappy within two years of leaving their business — do you have a plan for life after the business? Do you have a plan to minimize taxes in transferring the business? Do you have a plan to treat all children (business active and non-active) equitably?

• If applicable, can your children share ownership? Do you have any concerns pertaining to their relational harmony?

• What contribution do you want your business active child or children to make? Pay for all or part of the business? “Sweat equity”? Is their future ownership actually contributing to your retirement plan?

• Define fairness: What does “fair” mean to you and your spouse? To your business active child? To your non-business-active child? Do you need help with defining fairness?

• What is your contingency plan if transfer to family doesn’t work out? Sale to other insiders or ESOP? Sale to third-party?.

There is much at stake when and how you leave your business, and never is that more true than when transferring your business to children or family. You would be wise to be as thorough and detailed in your planning as needed well in advance of your eventual transition. For every question listed above, there can be ten or more “drill-down” questions. As always, please let us know if we can be of assistance.

email@ennislp.com | 301-859-0860

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

How Can A Charitable Lead Annuity Trust (CLAT) Help Me Attain My Business Exit Goals?

Minimizing taxes, based on our experience, seems to be a “core value” shared by most, if not all, business owners. And, seldom are they more cognizant of potential tax burdens than when transacting a sale of their business. Many owners are also characterized by generosity toward others through charitable giving.

A CLAT, or Charitable Lead Trust, is an Irrevocable Trust designed to provide financial contributions to one or more charities for a specified period of time, with the remaining assets eventually being distributed to family members or other beneficiaries. A CLAT also provides an owner with estate and income tax benefits that can be particularly helpful in the year of a business sale. For example, our fictional business owner Sarah successfully sold her business this year. Following are a few key data points:

• The payout in the year of sale is significant as she is in control exiting on her own terms and conditions. She built a sellable business.

• As a result of the large payout this year, she also has income and estate tax problems. Her exit goals include minimization of both income and estate taxes.

• Not only has Sarah been impactful through her business, but also through her generous and strategic giving to favorite charities through the years. She wants to increase giving with sale proceeds.

• Along with personal values that she wants to transfer to heirs as part of her legacy, she also has financial legacy goals. So, she would like for a portion of her charitable trust assets to eventually return to her family and beneficiaries.

• Due to her comprehensive planning process, Sarah has been able to sell her business on her own terms and conditions and have strategies in place to accomplish her tax minimization, charitable giving, and legacy goals — one tool playing a role in her strategy is the Charitable Lead Annuity Trust (CLAT). Sarah’s Charitable Lead Annuity Trust will provide her with both income and estate tax benefits, and work to accomplish her charitable and legacy goals.

If you’re a business owner like Sarah in the year of selling your business and have goals of minimizing estate and/or income taxes, charitable or philanthropic goals, and financial legacy goals, establishing a CLAT could play a key role in your comprehensive plan. Also, the current interest rate environment is particularly suited for CLATS as they are most effective when rates are low.

Check with your estate planning attorney and/or CPA, or contact us to see if a CLAT would be the right strategy for you. You can also learn more in our ExitReadiness® PODCAST episode with Estate Planning Attorney Jonathon Morrison of Ryan Frazer Goldberg & Arnold.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

2021 Exit Planning Checklist

All business owners will stop being business owners at some point.  So, there is no better time to begin planning for the inevitable than the present.  The earlier you begin planning, the more options you will have for a successful exit.

However, like any strategic plan, it can be difficult to know how and where to begin.  As we wrap up 2020, it's also an ideal time for us to publish a basic "To-Do List" that will serve you in considering that most significant event as a business owner...your future exit. 

DECIDE WHERE YOU WANT TO GO.  Establish Clear Goals and Objectives for Exit and Your Life After Exit.

• When do you want to leave the business? Whom do you wish to transfer/sell the business to?

• What are your values-based and legacy exit goals?

• What is your post-exit "life-plan"? Business owners can often regret leaving when lacking a plan for life that replaces the sense of purpose and meaning they experienced in building their business.

• Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS WHERE YOU ARE.  Without Accurate Data All Planning Becomes Meaningless.

• Get an accurate Business Valuation. If the business is your largest asset shouldn't you know what it really is worth to potential buyers?

• Assess your business Value-Drivers and areas of Risk.

• Review your Business Continuity Plan for life transitions and unexpected death or disability. Co-Owners would include a review of their Buy-Sell Agreement to ensure alignment with the current goals of all owners.

• Review your Estate Plan to ensure alignment with exit goals.

DESIGN AND IMPLEMENT A PLAN.  Build Transferable Value and Enjoy a Future Exit On Your Own Terms and Conditions.

• Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.

• Focus on growth and profitability today. At the core of tomorrow's successful exit plan is today's profitability and plan for growth.

• Strengthen business value drivers. An owner with a sellable business will have more freedom in life and options for exit.

• Update a strategic financial plan for business growth.

• Do you have the right Team of Experienced Advisors in place for your plan design and implementation?

• Who will Manage the Exit Planning Project? You, a current Advisor, or an experienced Exit Planner?

The most important thing you could do in 2021 would be to GET STARTED AND GET HELP if you have yet to do so.  If you wait until you're ready to exit to begin planning, you won't be ready and neither will your business.  Keep in mind, that "You don't know what you don't know" and, like in all other areas of life, that could end up being disastrous. 

There is much at stake during this most significant event in your life as a business owner.  Take steps in 2021 to be as successful in planning your eventual exit as you have been in running your business. 

Following are some Easy Next Steps:

Contact Us Today for a No-Obligation Exit Planning Exploratory Meeting.  Take our Free ExitMap Readiness Assessment and get Online Learning and Resources at exitreadiness.com.

Wealth Management for Small Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business into your overall plan for managing your wealth.

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

• Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?

• Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.

• A financial needs and gap analysis with an accurate valuation (not back of the envelope - meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?

• Personal risk management including asset protection, insurance planning, tax planning.

• A current estate plan — a business owner cannot do exit planning without doing estate planning.

• A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.

• An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

Contact us at email@ennislp.com for assistance in building sellable business value or planning your eventual exit. Please also consider investing 15 minutes in completing our FREE Exit Readiness Assessment. We do not ask for confidential information.

State Death Taxes and Exit Planning

We continually communicate to clients and prospective clients that as a business owner “you cannot do exit planning without doing estate planning, and you cannot do estate planning without doing exit planning.” Meaning that, as you plan your estate preservation and transfer in life and death, your business certainly needs to be under consideration, and if you are in the midst of creating your business exit strategy, you will quickly find that you will need to create or review your estate plan.

One of the many reasons to regularly review your estate plan is to be clear on death taxes (estate, gift, inheritance), and how your estate could be impacted. The current good news is that most small business owners don’t need to be concerned about federal estate taxes. For 2020, your estate would need to be worth $11.5 million or more ($23 million or more for a married couple) to be affected by federal estate taxes. For this reason among others, not a few owners choose to neglect estate planning, while there are other important factors to consider (i.e., asset protection; medical directives; lifetime transfers, etc.).

One such additional factor is the potential estate tax bill assessed by the state you reside in. For example, in Maryland, the estate tax exemption is less than half ($5 million for 2020) than the federal exemption, and the tax rate assessed can be up to 16%. Massachusetts has the lowest threshold of any state in 2020 of $1 million. The point is, you really need to understand, not just how you could be impacted on a federal level but also your state death tax structure. If you’re unclear, contact your estate planning attorney for a plan review.

Following is a link to a related Kiplinger article dated November 2019 (note: some states listed may have made changes in 2020) on the “18 States With Scary Death Taxes”.

Again, if you are at all unclear on your situation and how you could be impacted, contact your estate planning/tax advisor.

Please contact us for assistance in building sellable business value or planning your eventual exit. You could also check out our virtual planning solutions at exitreadiness.com.

The Importance of Estate Planning for Business Owners

It is not uncommon for the business to be the largest asset in a business owner's estate, while also being the primary source of income for their family.  As estate planning is essentially taking control of how property is managed during life and distributed and transferred at death, a business owner cannot do exit planning without estate planning, or estate planning without exit planning.  Exit goals, such as transferring a business to children, always impact an owner's family and estate.

An example of where an owner's estate and exit plans intersect would be in the area of business continuity.  Sarah, a widow of five years, owned a large women's apparel retail store.  She started the business twenty-five years ago and remained as sole owner as the business continued to grow and realize success.  Sarah's daughter Sue graduated from college three years ago with a degree in design, and both she and Sarah had a vision for Sue eventually taking over the business. Sarah's son Jack, and another daughter April, have no involvement in the business.  

Tragically, Sarah passed away suddenly a year ago causing great distress to her children.  The fact that she passed without having finalized her estate plan resulted in even more hardship for her family.  It was one of those things that she knew she needed to do, but just never could "get around to it" due to the day-to-day trials of running a thriving business.  She had a will but it hadn't been reviewed in over fifteen years.  

The consequences of not having designed and coordinated an estate and exit plan, Sue did not end up owning the business as both she and her Mom desired, the business was sold at a deep discount due to uncertainty among employees and customers, other assets also had to be sold to pay high taxes and estate settlement costs, and there was resulting tension between the siblings due to a disorderly distribution of assets.  This is a shortlist of the potential consequences of the deficient and disjointed estate and exit planning for a business owner.  

Like our fictional character Sarah, most business owners lead busy and full lives.  They can understand that estate and exit planning are important, but it can be difficult to plan the time to make it happen as it represents even more work.  So, it can be very easy to procrastinate.  

The focus of an impactful estate plan is not simply death but also the arrangement of assets (ownership and utilization) in ways that will help estate holders achieve financial goals in a tax-efficient manner during life while providing for survivors’ needs and the disposition of property at death. A successfully implemented estate plan can:

• Minimize estate taxes and estate settlement costs

• Ensure that cash is available to pay estate taxes and costs

• Provide for an orderly transfer of assets that meets the estate owner’s objectives and intentions

• Preserve assets during life

• Protect business and ensure its successful transfer or sale

• Provide peace of mind and family harmony

A well-thought-out and executed estate plan, as part of a comprehensive exit plan, will be instrumental in ensuring that the right person takes over a business when the current owner dies. Other issues that would be addressed in a comprehensive estate plan would include the appropriate business valuation, equitable estate distribution among children, a properly drafted buy-sell agreement, tax, and philanthropic planning.

As a business owner, it is wise to regularly review your estate plan to ensure that it represents your current desires and goals for your personal and business asset distribution. Please contact us if we can be of service to you in the review of your estate plan.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Successful Business Owners Have Great Impact

In our work, we are constantly aware of the incredible influence and good that result from the efforts of a successful business owner and their business.  Just a few of the good works include:

• Quality services and products.

• Empowerment of others.

• Creativity and innovation.

• Wealth and value creation.

• Peace, flourishing, and prosperity for communities.

• Charity and philanthropy.

And then there are common characteristics and principles often demonstrated by high-impact business owners in building a successful business:

• Integrity.

• Responsibility.

• Excellence.

• Diligence.

• Service to others.

• Building and leaving a legacy.

Successful business owners who embody such characteristics have a huge impact on many "stakeholders" when they responsibly and diligently build and sustain a successful business.  Impact on their family, employees, customers, suppliers, economy, and community.

As a business owner, will you have as great an impact when you leave the business as you have in building it?  Will your legacy as a business owner, and family legacy, be your desired legacy?  Are you being as responsible and diligent in planning your exit as you have been in building your business?  Will there be flourishing and peace for your many stakeholders as you leave?  

All of the tremendous good produced by you and your business are at stake when (and how) you leave your business.  The more time you have or take to plan for this most significant and impactful event, the greater potential for success and attainment of your goals and desires.  

Design and implement a plan to have a great (or greater) impact when you leave as you have in building the business.  

Contact us today for an exploratory conversation about your impact when exiting.

email@ennislp.com | 301-859-0860

You could also get started with our FREE Exit Readiness Assessment.

Business Valuations and Buy-Sell Agreements

Buy‐Sell agreements, in some situations, can create as many questions, problems, and conflicts as they seek to address.  A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time.  Unanswered questions, outdated agreement language that no longer represents the goals of the owner(s), an agreement that it is not comprehensive, too simplistic or was poorly implemented can render the buy‐sell agreement ineffective and more problematic than helpful.

One of the most important elements of a relevant Buy-Sell Agreement is the issue of assigning value to the business at a “trigger event” (i.e., death, disability, lifetime transfer, divorce, bankruptcy, etc.). Following are some of the questions pertaining to business valuation that business owners should answer with assistance from their Advisor Team in creating their agreement:

• The type of valuation that will be required — Will you choose book value, fair value, fair market value, investment value, historical value, agreed-upon value?

• The method to be used in calculating value — Will you use a formula-based method, a formal valuation conducted by valuation specialist, or a fixed-price?

• The timing of the valuation — Will you value the business on the date of a trigger event, as of the last valuation, each year with a formal valuation, or at some other point?

• The entire business or partial ownership interest — Should the entire business be valued or a partial ownership interest when there are multiple owners? Should discounts (i.e, minority, lack of control, lack of marketability) be applied?

• Valuation perspective — From what perspective will the business be valued…a hypothetical buyer, the majority owner’s perspective, other perspective?

• The method of funding the Buy-Sell Agreement — Owner buy-outs can be funded in various ways including insurance proceeds, debt proceeds, and cash flow of the business. Should the chosen funding method be considered in the business valuation?

Too often Buy-Sell Agreements are written without these questions and others being adequately addressed with the assistance of experienced advisors (valuation specialist, business attorney, CPA, exit planning advisor) and result in poor execution and relational conflict requiring extensive investments of time and finances.

In addition, your Buy-Sell Agreement should be drafted in light of your financial and estate plans which requires a coordination and collaboration of corporate and personal advisors. For example, your financial planning “number” you need for financial security at a trigger event should be coordinated with possible estate planning goals of tax minimization and transfer of your business interest to family members. NOTE: The role of an Exit Planner could be likened to that of a Project Manager or General Contractor, coordinating the planning efforts of experts in the design and implementation of an owner’s plan. And, this might be a plan for Business Continuity which includes the drafting of a Buy-Sell Agreement and/or a Comprehensive Exit Plan.

Contact us today for a comprehensive review of your Buy-Sell Agreement and a copy of our Business Continuity Instructions.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

email@ennislp.com | 301-859-0860

Planning For Exit During A Crisis

Prior to the crisis, there were owners planning to exit their business. There will be owners who plan their exit after the crisis, and owners who are now wondering when and if they will ever be able to leave. The following are accounts of three owners whose businesses have been impacted negatively by CV-19.

Jim has been planning for the last three years to sell his business in five years to a third party and move south. He knows how much money he will need for life after the business and what his financial gap is. His financial gap has grown significantly in the last month as his business would be valued by a buyer for much less if he’s able to sell. Now he’s not sure when his goals of fishing and golfing in Florida will be realized.

Susan, who has been in business for 20 years, has been thinking she’d initiate her plan for leaving next year when she reaches age 60. To this point, she’s done nothing to assess personal or business readiness for exit and has no real objective idea as to what her business is worth. Susan also really doesn’t know what exit route would be best as she has key employees who have expressed interest in eventual ownership, but she’s also thought about selling to a third party.

Until now, exiting her business wasn’t at all on Sarah’s mind. She’s well past the 5-year hurdle with ten years in business and is highly prosperous and profitable. Prior to launch Sarah had a successful corporate career that she finds herself missing more and more each day. It’s a lot different going to sleep each night owning the risk of a business, and with this crisis, she’s not sure how much longer she’s willing to do that. Thoughts of exiting are new to Sarah but frequent.

Each of these business owners has “exit on their mind” while working around the clock to manage and lead through a crisis with a goal of lasting. Following are a few baseline exit planning steps Jim, Susan, and Sarah can take now, in the midst of the chaos. And, at least one of these actions is needed for planning to make it through the crisis.

• Project cash flow for the next 12 months. Strong cash flow is a key ingredient for planning a successful exit. You can access spreadsheets for free at https://ennislp.com/corona-virus-resources. Effective cash flow management will also be critical for making it through to the other side of CV-19.

• Request an updated Financial Needs Analysis from your Financial Advisor calculating how much money you will need post-exit and whether or not you have a financial gap.

  • You will need an objective Estimate of Business Value for the Financial Needs Analysis to be meaningful. We could help with that if needed.

  • You may find that the results of your analysis demands a change in your departure date, your goals, and/or your planned exit route.

• Review your plan for the unexpected events of death or disability or Business Continuity. These times are difficult for you as an owner but would be even more challenging for those left behind if you were suddenly unavailable to work in the business.

• Begin to assess personal and business readiness for your exit. Invest 15 minutes and complete this free exit readiness questionnaire which will score you in areas of Finance, Operations, Planning, and Revenue/Profit. You will NOT be asked to submit any confidential financial information.

Please contact us if we can be of help in any of these steps. You can also access online resources at https://exitreadiness.com

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

How Can I Minimize Taxes At The Personal Level When Selling My C-Corp?

In most small business C-Corp or regular corporation sale situations, a sale of corporate assets will result in double taxation of the assets. The C-Corp is taxed first and then the owner will also be taxed on any recognized gain when they receive payment from the corporation as a result of the sale. Whereas, if your business structure is anything other than a C-Corp (LLC, Partnership, S-Corp) taxation only occurs at the owner or personal level (NOTE: If you’re a C-Corp and planning a sale at least five years out, ask your CPA about converting from C-Corp to S-Corp).

One way to avoid a double tax as an owner of a C-Corp is to sell the stock of your business rather than the assets. This is not easily done as a buyer wants the tax benefits of buying assets, and often doesn’t want any potential liability tied to the stock shares. However, if you are successful in negotiating a sale of stock, a resulting question will probably be, “Now, how can I also minimize taxes at the personal level?”

With proper planning, a Charitable Remainder Trust (CRT) can be a very effective tool in avoiding or deferring tax and provide other benefits:

• A current income tax charitable deduction.

• Appreciated business assets donated and then sold by it avoid capital gains tax.

• Proceeds from the sale of the business interest within the CRT can be used in diversifying into other assets to generate income for the life of the donor (business owner) and their spouse.

• A significant gift to a charity of choice is eventually made at your death or the death of your spouse and is excluded from your estate for estate tax purposes.

• Income accumulated within the CRT may not be subject to income tax.

Some of the significant planning considerations include:

• Creating the CRT and transferring business assets prior to a binding sale agreement.

• A qualified business valuation will be required.

• The trust is irrevocable and cannot be changed.

• The tax benefits result due to the assets placed in the CRT eventually going to charity and not the owner’s children/family.

• There are limitations to what the trust assets can be invested in (i.e., cannot be invested in another business).

For the right situation, a CRT can be very beneficial for an owner and their tax, estate and legacy planning. Have discussions now with your tax professionals to see if it could be right for you.

For a comprehensive approach to your exit planning, contact us today at email@ennislp.com or 301-859-0860. You can also assess your exit readiness with our FREE Exit Readiness Questionnaire.