1. Chapter 5 Estate and Ownership Transfer Planning Family Business, First Edition, by Ernesto J. Poza Copyright © 2004 South-Western/Thomson Learning

2. 5-2 Estate Planning Family business owner’s favorite target of procrastination Reasons for avoiding include  Time pressures, costs of advisors, aversion to insurance products and agents  Irrational optimism  Fear of loss of control of business  Fear of family conflict

3. 5-3 Estate Taxes Impact of Economic Growth and Tax Relief Reconciliation Act (2001)  Applicable only until 2010  In year 2010 only, no estate tax liability  Federal estate tax rates to fall gradually until 2010 Unified credit exemption increases yearly State inheritance taxes also part of estate planning

4. 5-4 Estate Tax Exemptions Year(s)Unified Credit 2002 – 2003$1.0 million 2004 – 2005$1.5 million 2006 – 2008$2.0 million 2009$3.5 million

5. 5-5 Estate Plan Tax reduction primary subject of estate plan Estate plan must also  Consider needs of family and business  Preserve speed and agility of business  Give successors capacity to lead

6. 5-6 Impact of Transfer on Speed and Agility Creates power vacuum CEO/entrepreneur departs Characterized by speed and agility Family business begins as entrepreneurial firm Leads to inaction or paralysis

7. 5-7 Give Successor Capacity to Lead by... Controlling distribution of voting shares among shareholders Avoiding stock ownership through complicated trusts Considering nonfamily CEO with contract Evaluating option of successor as co- president or offices of president

8. 5-8 Manage Corporate Structure Ever-expanding number of owners creates complex structure Solutions include  Recapitalize common stock into voting and nonvoting  Use buy–sell agreements to exchange stock for cash Valuation necessary to set value for stocks

9. 5-9 Valuation Approaches Accounting approach  Book value Market approaches  Multiple of equity  Multiple of earnings  Multiple of sales  Comparison with publicly owned or private held companies

10. 5-10 Valuation Approaches, continued Income approaches  Net present value of future benefits  Capitalization of earning capacity  Net present value of expected dividends Cost approach  Tangible and intangible assets Other considerations  Past transactions  Shareholders’ agreement and formulas

11. 5-11 Trusts for Estate Planning Grantor-Retained Annuity Trust (GRAT)  Allows transfer of property without gift tax or using up lifetime unified credit allowance Intentional Defective Grantor Trust (IDGT)  Allows transfer of nonvoting stock to heirs without gift or estate tax liability

12. 5-12 Equity and Nonfamily Employees Stock in family businesses often illiquid and unmarketable Employee stock ownership plans (ESOPs) a way to  Create liquidity  Diversify portfolio of assets  Reward employees for hard work ESOPs can be qualified retirement plan for employees

13. 5-13 Estate Planning and the Board Board can aid in estate planning by  Making owner accountable for developing successor  Making estate planning a priority at meetings For best leverage, board should include outsiders Board members who have already dealt with succession are invaluable