Family Limited Partnerships- They’re here to stay!

October 30, 2017

For the vast majority of people in this country, the issue of tax ramifications associated with gifting assets to their heirs is not of great concern; however, for the wealthiest people in the US, proper tax planning in the gifting process can represent an opportunity for tremendous tax savings.

For years, business valuation specialists have worked with estate planning attorneys to determine the discounted value of assets being gifted as part of a family limited partnership (FLP); the discounts inherent in the valuation of these FLPs typically means significant tax savings for individuals who are in the position of gifting interests in an FLP to their heirs.

For the last several months, the Treasury Department had contemplated making significant changes to the IRS tax code that governs the valuation of FLPs- changes that would have severely limited the ability of business valuation specialists to apply these discounts, and for the limited partners in an FLP to take advantage of them (I covered this last year here).

We have recently received word from the Treasury Department that those changes that were being discussed are no longer going to be implemented; this means that for the people who are gifting assets to their heirs that are above the gift exemption threshold ($5.5 million for individuals, $11 million for married couples), FLPs remain one of the most important tools to be used as part of an overall tax planning strategy.

The short video below discusses this in some detail, and also provides an example of how an FLP can assist in mitigating the effect of the current tax laws that apply in gifting situations. Please feel free to contact me with any questions- this can make a big difference in your estate planning process.

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Entrepreneurs- What’s Your Exit Strategy?

January 24, 2017

Working for yourself can be very liberating; but, don’t be so trapped in the minutia of the everyday grind, that you ignore the very important strategic planning that (hopefully) should go hand in hand with being an entrepreneur.

Hopefully, your exit strategy includes an element of maximizing the returns from a potential sale of your business, when the time comes for you to move on. There is probably a lot to do today, however, to ensure that you are able to get what you are expecting when it is time to sell your business.

Here are a few thoughts on the matter; feel free to contact me to discuss your situation in confidence.


Personal Goodwill-It Matters!

January 16, 2017

For business owners who are contemplating a divorce, the issue of personal goodwill takes on tremendous significance.

For two businesses of identical gross value, the type of business, the extent to which the business owner is involved in the business operations, and a host of other issues, may mean that one is worth a lot more in terms of what amount of its value is divisible between divorcing couples, than the other.

Please watch the video below, and please feel free to contact me with any questions as to what the potential impact of personal goodwill might be in your specific situation.


Are you a High net worth individual? This matters…

November 4, 2016

If you are fortunate enough to be a member of the wealthiest in this country (or know someone who is), the issue of gifting carries more significance for you than it does the rest of the population. This is because it is very possible that your gifts to your heirs, for example, likely constitute a tax-generating activity, above the gift exclusion amount that is allowed by the IRS.

Estate planning attorneys have worked with high net worth clients for the past few decades (in conjunction with valuation experts) to mitigate the effect of these taxable events, through the use of an entity known as the Family Limited Partnership.

There is currently a proposed modification to IRS 2704, the internal revenue code that governs FLPs, that if it becomes law, will greatly restrict the ability of individuals to utilize an FLP to minimize the taxes that are generated in situations where a gift above the exclusion amount is made. (You can read more about the 2704 regulations here).

The proposal is currently in a public comment phase; this phase ends at the end of 2016. This means that it is very likely that, at the end of 2016, the opportunity to utilize the FLP as an effective tax planning tool may be forever lost.

Please watch the videos below, to understand how an FLP might be able to save you a lot in taxes under the right circumstances; and then contact me if you have any questions about how this might apply to you.

Family Limited Partnerships and the IRS:

Family Limited Partnerships- a Brief Example:


Uh oh… Ashley Madison’s Caused A Problem…

August 21, 2015

So, it turns out that marital infidelity, or the specter of it, is one of the most prominent reasons why marriages are broken up- no secret there. And in the super-convenient world in which we live, where everything can be found at the click of a mouse, it should come as no surprise that there is a website, AshleyMadison.com, that caters to individuals who are actively looking to stray outside the bounds of their marriage.

The website’s tag line, “Life is short- have an affair” leaves very little to the imagination, and the website’s landing page featuring an attractive brunette with a forefinger over her pursed lips is a clear indication of the secretive nature of the “relationships” that might originate on the site.

Picture1

Ashley Madison, in subtle fashion, invites users to “have an affair.”

It would stand to reason that, for those who would choose to pursue that lifestyle, and would provide AM with their name, address, credit card info, email address, and other clearly identifiable information, there would be a reasonable expectation that the website would keep their information secure and private. But, due to a shocking case of corporate espionage by online hackers, and AM’s subsequent refusal to submit to their demands that the dating site be shut down, they have made good on their threat to release the private information of millions of their users.

The ramifications have been immediate and far-reaching. Josh Duggar, he of the former reality TV show “19 Kids and Counting”, confessed to being “…the biggest hypocrite ever…” after his information was found to be on the dating site. Shockingly, there are several congressional and White House-related email addresses that are among those in the data dump.

And family law attorneys the world over are preparing for what some are calling “Christmas in September” and “Black Friday”. Callers to a prominent New York-based family law practice are having difficulty getting through; according to an employee at the firm, “The attorneys are unavailable because there are so many people calling right now. You’ll have to call back later.”

So… what does it all mean?

We would never seek to take advantage of someone in a difficult situation, and a potential divorce, regardless of the reason, is traumatic and a life-changer for both parties, regardless of who is at fault. Our recommendation is always going to be to attempt to “weather the storm”, bearing in mind that many relationship experts agree that an affair is merely a symptom of a problem in a relationship, and that, while difficult, fixing the problem can result in a couple experiencing years of marital bliss with an affair safely in the rear-view mirror.

However, if you do find yourself in the position where you are seriously contemplating a divorce, there are some realities that you need to consider. While this should NOT be construed as legal advice, and your interests would be best served by consulting a family law attorney, it is generally accepted that if either you or your spouse owns an interest in a business, and you live in a community property state, the value of that interest is one of the items that needs to be separated between the parties.

What’s your action plan, then, should you, or someone you know, be facing this unfortunate situation?

  1. Get an attorney. Quickly. Several issues will need to be determined and decided on, and your attorney will be much better placed to help you through the next several months.
  2. If you or your spouse own an interest in a business, get it valued. While so many of the issues that you will be facing will be charged with emotion, obtaining a proper, objective value of the business interest might be one of the most important issues to be determined in the process.
  3. Beware of “quick and dirty” valuations. Understandably, with the cost of retaining an attorney looming on the horizon, there might be a hesitation to engage with another professional in this process. However, there are several issues specific to a valuation in support of a divorce that require the experience of a seasoned valuation specialist to be navigated.

The total value of the business; any minority discounts or control premiums; the presence of goodwill; given the existence of goodwill, how much of it is personal, and therefore attributable to the business owner; any/all of these might apply to your specific situation, and failing to deal with them in an appropriate manner might leave you in a position where your best interests are not being served.

I have personally seen instances (and been involved with a couple) where a business owner’s interests were not adequately served, because s/he did not bother to hire a valuation expert to ascertain the value of a business at the heart of a divorce proceeding.

For you, or the person who you know, who might be facing the unfortunate situation where a spouse’s name showed up on the Ashley Madison site, or if your marriage or the marriage of someone you know is similarly challenged with its own mortality, bite the bullet and speak to someone about your options- you owe it to yourself.

And if your series of questions includes what to do about a business interest in the marriage, please feel free to contact us for a confidential, obligation-free assessment of your situation.

To paraphrase Ashley Madison: “Life is short; be true to yourself.”


How To Have A Good Day in Court

July 27, 2012

Well, if you’re facing a divorce, or a business partnership separation, there might be no such thing as a “good day in court”; stipulated.

But there are several ways that you can have a bad day in court, and most of them are preventable.

The truth, the whole truth, etc...

The truth, the whole truth, etc…

If you are in a difficult situation that needs to be resolved in a court of law, one of the most important things that you can do is to ensure that you provide yourself with as much information as is necessary to sell your case to the court.

And if the information that is needed is the value of a business, you’re not giving yourself a chance to be successful if you don’t obtain a proper valuation, or think that your opinion of what the business is worth should be sufficient.

I was recently asked to testify in a divorce case as to the value of a business. Declining industry, poor outlook, and my value was very low- a few thousand dollars. The spouse of my client had different ideas; in that person’s mind, since the business grossed over a million dollars in one year a long time ago, the business must clearly be worth $1 million.

Worse (for that person), s/he decided that his/her opinion should be sufficient, and therefore did not hire an opposing expert.

Was I upset by that? Not really; I got to defend my opinion of value against what ultimately was an uninformed, back-of-the-napkin valuation. With a dozen or more issues to debate and fight over, my client was at least able to know that a well-reasoned, properly done valuation resulted in a conclusion of value of the business that the court was able to understand, and more importantly, rely on.

I have to admit that I wondered for at least a few days afterward about what went into the decision of not hiring an expert. Not that I wanted to have a more challenging time in court, but it was fascinating to me that someone in a court proceeding with so many long-lasting implications would not avail him/herself of the information needed to attempt to make an informed argument.

The obvious moral of the story- if you are ever in this situation (or one like it), information is key. A judge/jury will be more than likely to side with you if you have objective, “defendable” information on your side, as opposed to an entirely subjective “valuation”, that is grounded in, and motivated by, a host of factors and emotions that, while significant to the overall situation, might not be relevant in the context of determining the value of a business.
Cheers…


Own a Business? Retiring soon? Here’s something to think about…

October 18, 2011

So you’ve worked for several years, building a business that has sustained you and your family, allowed you to provide a few dozen jobs (or more) over the years for your grateful employees, and generally allowed you to be a good corporate citizen.

You certainly don’t want to do this forever, however; life begins at retirement, after all, and you want to make sure that you’re able to truly enjoy the fruits of your labour. So, the sale of your business is in order. For purposes of this article, we assume that you are approximately 5 years away from actually leaving your work career behind.

What issues need to be addressed in order to prepare for the day when your business is firmly placed in your rear-view mirror? Here are a few thoughts:

1. Get your business valued. TODAY. You do not want to find out, when you are a few months away from retirement, that your business is nowhere near the value that you thought it might have. It is the tendency of most business owners to think that their businesses are more valuable than they actually are- call it the “no ugly babies” syndrome.

You will need to be able to take corrective action to improve the value of your business if you know what your baseline is. It is also a good idea to have this done annually as you approach the day where you will no longer be involved in the business- you need to know how the business value is trending from one year to the next. You ostensibly would like for this number to be increasing over time, and it is a good idea to verify that independently.

2. Thoroughly document all of your processes. From the mundane to the highly complex, everything needs to be written down. Remember- you’ve been in your business for several years or more, and so you know all of your duties like the back of your hand. But a potential new owner will not have that same knowledge bank, and will need to be able to ramp up in pretty short order to not experience any drop-off in his/her new business after ownership changes hands. And you should know that this is one of the most important issues that impacts the value of a business that will be changing ownership.

3. Thoroughly document all of the processes of your subordinates. Again- from the mundane to the complex, it all needs to be documented. If you’re a good business owner, you have loyal employees who have been with you for several years. They operate independently, and are easy to supervise for that reason. But if they were to not be available, for whatever reason, and they needed to be replaced, it would certainly to be your advantage for a new crew to be able to pick up where the old one left off.

Ask yourself this question- what if your employees all left TODAY? Maybe they all pitched in and bought a winning Powerball ticket, and now they each have $3 million coming to them? If your business would be adversely impacted, maybe you need to look at providing more documentation on all of the duties of your employees.

4. Identify a right-hand person to be in charge of operations. You may already have this person- a GM/operations manager type. If so, great- begin the process of handing over day-to-day operations to him/her. You do not need to divulge the reason for this- it is a natural developmental process for a member of management in any case- but the presence of a key person who can be in charge of the operational aspects of the business is a key component of preserving the value of a business.

5. Maintain a clean set of financials. Yet another reason why this is always a good business idea-  a potential purchaser for your business will eventually need to scrutinize them. And clean financials are no doubt an asset (no pun intended) when an external entity, such as a business valuation specialist, needs to use them.

On a related note- your financials need to include 5-year projections/pro forma financial statements. This is key to understanding what the business outlook is, and in fact is an important component of one of the most important business valuation methods- the Discounted Cash Flow analysis.

Finally,

6. Create a timetable for your departure. It will of course be highly specific to your business, and you might be the one best suited to putting it together. Some occurrences for which you might want to plan:

  • It typically takes a minimum of 6 months for a broker to get your business sold- in all likelihood, you’re going to need more time than this.
  • Think of all of the administrative items that you need to get done- your name off of the leases, debt obligations, Secretary of State filings, etc- a lot to do there. A good business broker will be able to assist you with this.
  • Ensure that your employees and management staff are all going to be able to keep the business thriving through the transitional period- you will especially want to ensure that they are all trained appropriately.

These are a few considerations that you might want to entertain as part of the overall process of planning for the change of ownership of your business; if you would like to talk about how this impacts you specifically, please feel free to contact me for a confidential, no-obligation conversation.