By Desiree French
RISMEDIA, March 26, 2007-If you die today or tomorrow what will happen to your heirs and your company? If you've devised a strategy to protect your assets that would be beneficial to both, then chances are you have very little to nothing to worry about. Unfortunately, some real estate brokerage owners aren't as grounded. They have exposed their families and their companies to irrevocable harm by failing to create an estate plan that could later reduce taxes, expenses, and major complications.
"It's one of these things that everybody needs and nobody wants to do," concedes Joe DiJulio, an attorney who specializes in trusts and estates for Williams Mullen law firm. You need an estate plan-which involves strategies and techniques to build your estate during your life, as well as decisions on how to distribute property upon your death-or the state will determine how to divvy up your assets and Uncle Sam could become your biggest beneficiary.
Savvy business owners know better. They understand the ramifications of leaving the future to chance. They can also appreciate that the business is often their largest asset and, as such, is an extremely important part of any estate plan. So issues dealing with the organization and operation of the business, including succession, have to be thought out carefully-and preferably set in place early-taking the legal, economic, and tax implications into consideration.
A Lifelong Plan
It can be a daunting and complicated task. But with proper legal counsel and other professional support, you can construct a plan that is best for you. Consider the possible alternative: the forced sell of the business by your heirs to pay estate taxes levied by the federal government. The so-called death tax, or inheritance tax, can range from 45-50%, depending on the state where it is imposed.
So what to do? Where to begin? You may want to do as Peter Helie, the chairman and CEO of Prudential Connecticut Realty, did 20 years ago. Become familiar with how estate planning works by conducting your own research and communicating with your family and business partners about a possible plan that may work for you. Then, find an expert who can help you structure and document the plan and thoughtfully consider strategies that might work best.
Helie, the principal owner of Prudential Connecticut, which had more than $6 billion in sales volume in 2005, says it's key to get good advice. "Estate planning covers all stages of your life, and business owners, whether making a profit or not, need to create a plan. Life is a very fragile thing, and you never know what's around the corner."
How you structure a plan will depend on your situation and what you are trying to accomplish. Provisions for how the business will operate will depend on whether the company is a family run business or one that will require an outside successor upon your death. Some things to consider:
— Passing the company to your children. You can start making tax-free asset transfers to them now to avoid higher tax payments later. This can be done through a gifting program. The federal gift tax law provides a $12,000 annual exclusion, which lets you give any person during a calendar year tax-exempt gifts of $12,000. The yearly exclusion can be used for any number of gifts, and a husband and wife can also give $24,000 together, even if the $24,000 is the property of only one spouse.
— A family limited partnership (FLP) is a good gifting vehicle, depending on the type of business entity formed. When done correctly, it's a winning way to package and give away assets to children because of substantial discounts for federal gift and estate tax purposes. Used by itself or in association with other techniques, it's also a wonderful strategy for asset protection because a FLP can safeguard assets from potential claims and lawsuits. FLPs are usually formed to hold real estate property and not actual real estate firms. So, if your business is structured as a S Corporation, you can't have it within the family limited partnership.
— If you don't plan to leave the business to family members, you should have a shareholder agreement that stipulates who will buyout who. A buy-sell agreement, a contract between shareholders or partners that establishes a plan for the business in case one of the owners dies or becomes incapacitated, lets you document whether you want your partners to purchase your share, if you want your heirs to sell your share, or if you want to block certain individuals from having a role in the business altogether.
— Life insurance that was purchased in the past can be used, either by your heirs or your partners, to fund the buyout. It can also provide survivors with the funds to meet the cash needs to settle an estate. And in a cross-purchase agreement, where each partner owns a policy on each of the other partners, it can give surviving business owners tax-free proceeds to purchase your share of the business from your estate. "Life insurance," DiJulio exclaims, "can be an equalizer."
— Trusts are legal tools that can be used to transfer and manage wealth. They can be very beneficial to your estate plan. Some, for example, can be used to save estate tax on the estate of the second spouse to die or to store some of your growing company's stock for the benefit of your spouse and children. Different types of trusts exist, including a revocable living trust, a marital life or AB trust, and a QTIP trust.
A Close Eye on Tax Laws
There are literally dozens of ways to structure an estate plan, and changes in tax laws add another dimension to the whole process. Most recent changes were made in the calculation of federal gift and estate taxes ten years ago, and again six years ago by the Economic Growth and Tax Relief Reconciliation Act of 2001. Virtually every nuance can either bear favorably or adversely on your plan.
Loren Tauer and Dale Grossman co-authored a study, Estate and Succession Planning for Small Business Owners, for Cornell University. It explains how, through the year 2009, the estate tax credit will continually increase and tax rates will fall. The result: over time, larger estates will be exempt from estate tax. By the year 2009, only estates worth more than $3.5 million will be subject to estate taxes. In 2010, the estate tax, but not the gift tax, will be repealed. However, if legislation is not passed by Congress to permanently eliminate the estate tax, beginning again in 2011, the estate tax will be back to pre-2001 levels. The exempted amount this year and next is $2 million.
Uncertainty about the future of the federal estate tax, and the current phase-in of new tax rates and tax credits, make it essential to regularly review the status of the law and its impact on property ownership and transfer decisions. Which brings up another point: revise your plan as personal and business conditions change-for example, the birth of a child, divorce, growth in personal assets or company profitability, and the sale of corporate assets. Helie has changed his estate plan four times in two decades.
New situations will almost certainly warrant a change to your estate plan. Jim Rose, the chairman & CEO of Rose Womble Realty in Virginia Beach, has been in real estate for 44 years. When his company, Rose & Krueth Realty, merged with Womble Realty in 1998, attorneys and counselors were immediately called on to provide estate planning assistance to all the parties concerned. Each partner at Rose Womble Realty, which did between $1.7 billion to $2 billion in overall business last year, has an estate plan that incorporates the business, including a buy-sale agreement.
Rose, 77, is married with two children, three grandchildren and one great grandchild. He encourages everyone to put together a will and an estate plan. "It's the least you can do," he insists. "I have seen people decease without a will; it's a disaster."