familyownedbusinessblog

Summary of New 2010 Estate and Gift Tax Relief

Before EGTRRA of 2001 was scheduled to sunset, Congress acted and President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA"). TRA extended some of the provisions of EGTRRA and JGTRRA of 2003 and added some new provisions such as portability and indexing (both of which will be discussed in future posts on this blog).

Because TRA is the Act that is applied to all estates of people dying in 2010. However, because the passage was so late in the year, the personal representatives and trustees of those estates are given the option to choose to have provisions of EGTRRA and JGTRRA apply to the estate or to have TRA apply.  Which option to choose will be decision based on whether in the long term, it is better to have the estate pass to the heirs and beneficiaries estate tax free or whether it is better to pay some tax but receiving the step up in basis.  This is because in 2010 the estate tax was repealed but there was only a limited step up in basis available under EGTRRA.  If TRA applies, the assets receive a step up in basis but the amount of the estate passing without estate tax is limited.

The limited of that tax is $5M per person ($10M per couple).  This limit applies to the assets being transferred at death and those transferred during the lifetime of the donor as a gift. From 2001 through 2010, lifetime gifting without incurring a gift tax was limited to $1M per donor.  But TRA unified gift, estate and generation-skipping transfer taxes to a lifetime limit of $5M.  This presents a golden opportunity of wealthier Americans to make large lifetime gifts of appreciating property to members of the family circle. This circle may include children and grandchildren (and more remote decedents) because of this unification.  Note, if in the future the estate tax is lower than $5M, any lifetime gifts made will come back into the estate of the decedent. Those gifts in excess of the estate tax imposed on the date of death will be subject to estate tax. If you make a $5M lifetime gift and the estate tax imposed is $3.5M, your estate will owe an estate tax on $1.5M.  However, you have managed to make a tax free gift for federal and state purposes and frozen the value of the asset at the value at the time of gifting. 

For a full summary of TRA 2010 click here.

The Legacy Family ... A Family for the Generations

I attended this presentation by Dr. Lee Hausner at the Annual FFI Conference.  She has co-authored with Douglas K. Freeman, J.D., L.LM, their latest book, "Legacy Families...The Definitive Guide to Creating a Successful Multi-generational Family".

Dr. Hausner defines a Legacy Family as one which is in the 4th or 5th Generation and has shared assets.  She has found that these families have four characteristics:

1. Capacity: they have the capacity to add value to our society;
2. Competency: they have the necessary skills and education;
3. Connection: they have a connection to their ancestors, current and future descendants; and
4. Compassion: they are generous of their time, talent and treasure.

Generally, the Legacy Family has four balanced "capital deposit accounts":

1. Human Capital: this is general parenting and grandparenting skills, communication skills, values, morals, ethics, collaborative decision making, conflict resolution skills, leadership training and team building.
2. Intellectual Capital: education, career choices, mentoring/coaching, governance - how rules are made for future generations, rights and responsibilities of fiduciary and beneficiary roles.
3. Financial Capital: earn money, manage and invest assets, wealth transfer strategies, family business, financial parenting, understand the psychology of money.
4. Social Capital: philanthropy, donor-advised funds, family foundation.

The family should be engaging in activities that build each of the 4 capital accounts so that they maintain balance.  The following are suggesions that families can input to help keep balance in their capital accounts:

• Effective communication among the family and the stakeholders;
• Adopted a process for collaborative decision-making;
• Develop conflict resolution skills;
  • An example was the creation of a board to resolve conflicts among family members.  Each party chooses someone and then those selected choose a third member.  That panel then hears from both parties and submits proposed resolutions.
• Shared values: articulate the behaviors that are acceptable;
• Diversity: acceptance of non-bloodline family members and partner choices for family members;
• Manage expectations: clarity of expectations from future generations; clarity of financial support that will be provided to future generation;
• Financial competency;
• Generational leadership and governance;
  • Rotate the chairmanship of family meetings among all generations, including children, have an agenda, everyone participates
• Focused achievement: model of "work" ethic, focused on doing something everyday
  • Dr. Hausner suggested that even if the parent plays golf everyday, that the person leaves the house dressed for work, hides the golf clubs in the trunk and goes to the course at the same time everyday to demonstrate to young children the "work ethic" of doing something productive everyday.
• Accountability: specific behaviors that can be counted and measured,
  • Being "nicer" to my siblings is not something that can be counted and measured, but I will have lunch with my sibling once a month and we will not talk about business is something that can be measured.
• Heritage and Traditions: choose dates for family meetings that are not holidays, be sensitive to diversity (eg: in-laws being able to see their families of origins on holidays).

 We as advisors can use these suggestions and work with our clients to help them keep balance in their capital accounts.

How to make sure your family business does survive the next generation

I recently read an article in the Family Business magazine which provided thirteen easy ways to make sure your family business will not survive past the next generation.  I wanted to put a positive spin on the article and provide some ways to help make sure that your family business can survive:

1. Execute an estate plan that includes a will or a trust. The plan should take into account transfer issues and estate taxes.  If you don't sign a will or a trust, then the state where you live is happy to provide one for you called intestate succession.  This statutory "will" does not take into account any tax planning and may not be the distribution scheme that you would choose.
2. Communicate with your family members and key employees about your estate plan and the succession plan.  The "reading  of the will' should not be the first time your family or key employees learn of your estate or succession plan.  Yes, there are things that you may want to keep private, but there should be general understandings of the plan.
3. Communicate with ALL members of your family about their wishes with regard to the family business.  We recently had a discussion with a client whose adult children were not involved in the family business.  We met with the client and adult children to discuss the business - the client was very surprised when the adult children indicated an interest in assuming the leadership of one arm of the business.  It has completely changed the family dynamics AND the succession plan for that particular portion of the business.
4. Make a plan for liquidity - what happens if the business does not have the cash flow to pay estate taxes or to buy out the interests of a deceased stakeholder?
5. Accept diversity - include non-bloodline family members in the discussions regarding the estate and succession plan.  Also, those non-bloodline family members may have talents that will be beneficial in the business.
6. Family employment plan - adopt a family employment plan which addresses issues of how and when to hire family members, who will supervise, and establishing compensation.
7. Independent directors - consider electing several board members who are independent.  When we say independent - we mean INDEPENDENT.  The independent board member should not be someone who has been a close family friend for 25 years, or the family's attorney, CPA, or insurance broker. 
8. Buysell Agreement - if stock is given or sold to family members or employees, it is important to have a buysell agreement in place to govern the future sale or transfer of those shares.  It is critical that a shareholder who wishes to divest himself or herself from the company has a process for making that change in ownership happen.