Page 28 - MetalForming December 2010

Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein, LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult? Need a second opinion? Contact Irv:
Blackman, Kallick, Bartelstein 10 S. Riverside Plaza, Ste. 900 Chicago, IL 60606
phone: 847/674-5295
e-mail:
Blackman@EstateTaxSecrets.com www.taxsecretsofthewealthy.com
The 32nd president (FDR) said in 1933, “Fear paralyzes those who suc- cumb to it.” Some things are down- right scary, especially estate taxes. Can you guess what area in estate-tax plan- ning causes the most anguish? It’s busi- ness succession. Whether the reason for stepping down is age, illness, a desire to travel or play more golf, give into your spouse’s pleading to “spend more time with me,” or a host of other reasons, the fear factor is almost always a player.
Following are six questions that lead the fear-factor parade:
1) How high will my income tax/cap- ital gains taxes be if I sell to the kids (or employees) now?
2) If I don’t sell now, how much will the increasing value of the business increase my estate-tax liability?
3) What if the kids mess up? Will I get paid? Will I be able to maintain my and my spouse’s lifestyle?
4) Will the bank let me off the hook for the business loans that I guaranteed? 5) How can I treat my nonbusiness
children fairly?
6) What’s the number one fear? Con-
trol! It is rare that a business owner is willing to give up control of his business. Here’s an example of the control- fear factor at work: About one out of every three business owners who ask me to do their estate plans own 51 percent of their business, while the kids own the other 49 percent. Why 51 percent? The fear of losing control. Few professionals know what to do to calm the control fear. Our job, as consultants, is to come up with solid (accepted by the IRS) solu- tions that will calm the business owner’s fears. Following is a true-life example of a business owner (Joe) of this column. Joe is married to Mary. His son Sam
(age 31) works in the family business (Success Co.) David (age 36 and the key employee)—not related to the fam- ily—has natural business instincts, is respected by the employees and helps Joe run Success Co.
Let’s list Joe’s fears and concerns, which we have turned into goals.
1) Keep control for as long as Joe lives. Joe owns 100 percent of the stock of Success Co. (an S corporation). We recapitalized (having voting and non- voting stock) Success Co. so Joe retained 100 shares of voting stock and 10,000 shares of nonvoting stock...a tax-free transaction. The strategy is for Joe to keep the voting stock (and control) to the day he dies. The nonvoting stock will transfer to the kids.
If Joe had owned only 51 percent of Success Co., the strategy would work the same, but after the recapitalization Joe would own only 51 shares of the voting stock (keeping control) and 5100 shares of the nonvoting stock.
2) Transfer Success Co. to Sam now (freeze the value) without getting beat up with income/capital-gains taxes. Sell the nonvoting stock to an inten- tionally defective trust (IDT). The tax beauty of an IDT is that Joe legally avoids capital-gains tax on the sale. Say the price is $8 million, paid with a note, and the profit is $6 million.) No capital-gains tax is owed on the $6 million profit and no income tax is due on the inter- est Joe is paid on the $8 million note.
Typically the note is paid in full over 5 to 8 years, using the cash flow of Suc- cess Co. When the note is paid in full the trustee of the IDT distributes the stock to the trust beneficiary (Sam). As you can see Sam never pays a dollar to own the nonvoting stock.
26 MTALFORMING / DECEMBER 2010
www.metalformingmagazine.com
BLACKMAN ON TAXES IRVING BLACKMAN
Many Family Business Owners Fear Succession Planning; Let’s Calm Those Fears