Annapolis, Maryland Wills, Trusts & Estate Planning

Passing the Farm to the Next Generation Seen as Hardest Chore of All - Annapolis Estate Planning

Of all the many tasks that farmers must complete, the one they are most likely to put off is putting a plan in place to pass the farm to the next generation. It requires considering one’s own mortality and dealing with complex financial and tax issues.

Most farmers would rather bring in an entire harvest themselves or clean out the stables than address the issue of succession planning. But this is one task that cannot be put off forever, without risking the future of the family farm.

The reason to address this sooner rather than later is that bequeathing a farm is a process, not an event. It should be a gradual transition that allows ample time to resolve unexpected and inevitable issues, while it facilitates the transfer of knowledge crucial to keeping the farm going when management changes.

Modern Farmer’s recent article, “Agronomics: Estate Planning,” explains that the first step isn’t easy. It’s writing up a full financial assessment of assets, revenue, debts and future capital needs. The second is harder still: getting your family together and discussing who gets what. This step can expose deep-rooted feelings, although the assessment should help keep the talks grounded in actual value, not sentimental value.

You don’t have to moderate these conversations yourself. You can ask your estate planning attorney for help. He or she may know of creative succession strategies.

One idea is to create two limited liability companies (LLCs): one for the land and another for the business, animals and equipment. This will convert assets to units or shares that can be given or sold to a successor, making the transfer of ownership much more straightforward. Parents who are ready to retire could sell the business to a child for a nominal amount and the business could lease the acreage from the parents to give them retirement income.

Parents who plan to give shares should start doing so immediately to avoid burdening their children with tax liabilities. You can gift up to $14,000 annually to each individual. That amount goes up to $15,000 in 2018.

In addition, if the entire enterprise isn’t overly profitable, consider the cash-generating possibilities of a conservation easement. That’s where a land trust pays the farmer for an easement, which restricts development (and decreases the property’s assessed value), while allowing agricultural uses.

Whether you are farming a small spread or a huge ranch, start the process by speaking with an estate planning attorney who routinely works with farm families. It can be intimidating, but an experienced professional can help you, your spouse and children work through the details, so that you can all focus on keeping the family farm going for generations to come.

Reference: Modern Farmer (October 20, 2017) “Agronomics: Estate Planning”

Holden & Campbell, LLC – Annapolis Estate Planning Attorneys

Best Time to Start on a Succession Plan? The Day You Start Your Business - Annapolis Estate Planning

It may sound whimsical, but the moment you open a business is also the time to start thinking about how you’ll exit the business, whether you intend to sell to a partner, leave the entire business to a family member or sell as soon as you come up with the next big idea.

One of the biggest mistakes made by entrepreneurs is failing to create a written plan for their long-term exit strategy. What they don’t understand is that by creating a succession plan, which includes ways to boost the value of the business years before you want to sell or retire, they’ll have a created a road map for a more successful business.

Springfield (MO) Business Journal’s recent article, “Starting a business? Plan your exit now,” advises that you begin with creating a culture of success with your employees, especially the key people. That means fostering an ownership mentality, so they see their critical role in the company’s long-term success and their role in helping that to continue in the future, long and short term.

One of the first steps is to identify who will take over, whether that’s a partner, family member, employee or a purchaser from the outside. For death-of-owner planning, you should draft a buy-sell agreement with an experienced attorney. A buy-sell agreement will include a purchase price formula. That formula needs to be revisited as conditions change.

 The next step is to decide how the buy-sell agreement will be funded. A common option is life insurance. The business owner is the insured, and the successor-owner is the beneficiary. This policy can provide necessary and immediate cash for the successor-owner to purchase the business from a surviving spouse.

If you want an employee or family member to take control at your retirement or death, start with their training and/or experience now in order to get them adequately prepared. You may also consider “stay-put” agreements to keep key managers and employees around to help with the transition to new ownership. You may want to consider a “stay bonus”, in addition to regular pay as an incentive.

Every “death-of-owner” planning scenario also applies to exit plans from the sale of the business. Here are five other contingency planning items:

1. Disability, illness or injury of the owner. With disability/income replacement insurance for the owner, think about business overhead expense insurance. That insurance helps make sure the bills are paid and the doors stay open while you’re out.
2. Death or disability of a key employee. Consider the expense of replacing a top manager or salesperson temporarily or permanently. What revenue would potentially be lost during the transition? Look into key-person life insurance and/or key-person disability insurance.
3. Resignation of a key employee. With an executive bonus plan, a “golden handcuff” can help. One way is to contribute to a cash-value life insurance policy on behalf of the employee. The life insurance component gives the employee’s family important financial protection if she dies, and the cash value can supplement retirement savings one day, if she does not die. This will let the employee see how much she means to the business. Vesting terms in a written agreement will also make the program even stronger, because if she departs before the vesting period is complete, she’ll lose some or all the benefits.
4. Commercial property and casualty insurance. These policies can include business continuation provisions to cover expenses and payroll during any downtime after a catastrophe.
5. Estate planning. Review your estate plan with your estate planning attorney, with a dual focus: your business and your family’s best interests. Your plan must address estate tax and gift tax issues. It should include your will, powers of attorney and other estate planning documents.

Avoid the hazards that occur for so many business owners because they fail to plan for the future. Doing so early on, will allow your business to flourish long after you have moved on.

Reference: Springfield (MO) Business Journal (October 2, 2017) “Starting a business? Plan your exit now”

Holden & Campbell - Annapolis Estate Planning Attorneys

Holden & Campbell - Annapolis Estate Planning Attorneys

IRS Proposed Regulations May Curb Estate Tax Savings For Family Businesses - Annapolis Estate Planning

The IRS recently proposed regulations that, if adopted in final form, appear to increase the tax burden on wealthy individuals whose estate plan includes shifting assets to family members through transfers of minority interests in family controlled entities.

Under current law, individuals currently have the ability to shift assets to family members in a tax-efficient manner by transferring minority interests in family controlled entities, such as family businesses, family limited partnerships, and limited liability companies. What makes these transfers tax-efficient is that a taxpayer can claim significant discounts when valuing the interest for transfer tax purposes, primarily because the gifted minority interest lacks control and marketability.

While it has been expected that the IRS would eventually issue regulations that would curb the use of valuation discounts, the breadth of the newly proposed regulations is an unexpected development. If enacted in final form, the proposed regulations appear to severely limit, or eliminate, valuation discounts on transfers of minority interests in family controlled entities.

Next steps

Planning around the proposed regulations will be challenging due to their complexity, and also because it is not yet clear what form the final regulations will take. In addition, it is likely that there will be court challenges to any final regulations, although it may be some time before such actions are filed and adjudicated.

Despite these uncertainties, it is clear that the loss of valuation discounts would eliminate a valuable planning strategy for wealthy individuals and families that have created, or are considering creating, such entities as part of their estate plan. If you think you may fall within that group, I urge you to contact our office as soon as possible to discuss the impact of these recent developments and to take any needed planning steps prior to the anticipated effective date of any final regulations.

Timeframe

It is difficult to predict when the proposed regulations will become effective. Nonetheless, it appears that most of the proposed regulations, if and when adopted in final form, will not become effective for at least 30 days after a hearing scheduled for December 1, 2016. This provides a window, though not a large one, to consider and implement appropriate planning steps prior to the date that the regulations would become effective.

How we can help

Please don’t hesitate to contact me if you would like to discuss your situation in more detail.

Holden & Campbell - Annapolis Estate Planning Attorneys

Business Succession 101: Think Like a Royal - Annapolis Estate Planning

There any many reasons why patriarchs and matriarchs often have great difficulty letting go of the power and ownership of the family business. These may include (as with Queen Elizabeth) a fierce sense of duty, intense popularity, deep familiarity with the business, a desire to complete the heroic mission, and, not uncommonly, an unconscious fear of his or her mortality. Sometimes, however, family business owners lack confidence in the next generation or cannot find a suitable successor among them.

Business succession seems to be a hot topic as of late (See Frank's recent blog: Selling The Business - Learn From Others' Mistakes), what with the aging baby boomer generation set to start passing on the baton to the next generation.

If you are a baby boomer business owner, then consider a family that has some real life experience in managing successful successions – the Royal Family.

For some royal perspective and thoughts on the young Prince George Alexander Louis (the instant media darling and infant son of Prince William and Kate Middleton), WealthManagement.com recently offered an article titled “A Lesson from the Royals: Succession Is a Two-Way Street.”

Succession really is a two way street. In one lane, it is the king stepping down to name his successor. In the other lane, it is his successor seeking to prove himself worthy to be the king. The principal is the same in business, and yes, even in small family businesses.

The perennial problem is that a business requires tested leadership and ability. Unfortunately, real life experience is a very difficult thing to acquire until you are actually holding the reins. That noted, few business owners are comfortable handing over reins even to their own successors.

If you are a would-be-king, then there are some principles to learn to prove yourself, to stand out, and to step up to the task on your own. Fortunately, the original article offers some practical advice.

And then there is the other side. As the current business owner – king of all you oversee – you also need to be mindful to give your successor some “playing time” while you can coach them.

The actual act of transferring the business can be complicated, for reasons legal and financial. As with any “dance,” timing is key.

If your family business is worth keeping afloat, then the successful succession of its leadership is as great a goal worthy of your time and focus.

The Owner has retired; God save the Owner.

Reference: WealthManagement.com (August 30, 2013) “A Lesson from the Royals: Succession Is a Two-Way Street”

                               Holden & Campbell, LLC - Annapolis Maryland Estate Planning Attorneys

Selling The Business - Learn From Others' Mistakes - Annapolis Estate Planning

Every year, I used to get together with a client who was a business owner, and every year I would ask him, “Bruce, have you told your guys that you want them to buy the business?” He had a plan that he would eventually sell his contracting business to his senior executives, but he had yet to inform them of this fact.

There is a right way to sell the business to your own managers or your own family members, and then there is a wrong way. Since you cannot live long enough to make all of life’s mistakes, then it is wise to learn from the mistakes of others.

In this spirit, consider a recent article in The New York Times titled “The Wrong Way to Sell a Business.”

Essentially, there are two types of owners when it comes to the sale or succession of their business. First, there is the one who knows they will sell the business, but procrastinates all the way up to the bitter end. This is not the owner/manager to emulate, and the article showcases a proof-positive example.

While you might think your managers are ready and willing to buy your business, they may have other ideas. Regardless, they likely will need time to acquire the capital and then structure their affairs accordingly. If nothing else, managers are not owners until they start thinking of themselves as such, and a bit of lead time can instill such a feeling.

But what about the other type of owner? Again, the article provides an example of an owner/manager who has a very decided life-goal in place and can therefore work to instill life-goals in his managers. Accordingly, if you plan for yourself, and allow your managers to plan for themselves, then you can train managers who can transition into becoming owners.

When the succession planning is successful, the transition is almost nothing more than economics. True, sometimes these transitions just do not work out, but it is rarely out of an abundance of planning or understanding. Instead, more than a few deals fall apart simply because they are all too sudden and unplanned. 

Reference: The New York Time (August 29, 2013) “The Wrong Way to Sell a Business”

                            Holden & Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

Annapolis Estate Planning: Would You Give Your Employees Skin In The Game?

In family businesses, there are two main ways stock gets diluted: it gets passed on to employees or it’s passed down through the generations.  We often see the first situation occur in families when owners give out shares to non-family executives as part of a compensation package.

Although some businesses are family owned, that doesn’t necessarily mean they are run by members of the family. And in order to get those non-family members to approach the business with the same “family” mindset, many business owners are giving their employees skin in the game.

The most common form of “skin” in the game is company stock. Done right, this approach can be a win-win for all parties involved. That said, great caution is due; beware, as described in a recent WealthManagement.com article titled “The Tyranny of Minority Shareholders.”

Structuring your family business for the future is not an easy task. What of value in life is? While each company and family is different, making a key employee a part owner certainly can give them added incentive to run things when the family cannot or will not.

On the downside, you can create tension between the family owners and the key employee turned minority shareholder. For example, conflicts can arise should the majority owners (i.e., the family members) take actions in their own self-interests without considering the concerns of the minority owners (i.e., non-family members). In some cases, a minority shareholder can be protected by state and federal laws as in the case discussed in the original article regarding the Empire State Building IPO.

Even if you do not own an international landmark, there are many ways you, your family, your non-family executives, and, yes, your business, can find a happy medium. However, it takes time and qualified counsel to structure things correctly.

Reference: WealthManagement.com (June 20, 2013) “The Tyranny of Minority Shareholders”

Holden & Campbell, LLC - Annapolis Estate Planning Attorneys

Annapolis Estate Planning: Succession Planning: Avoid Strife When Passing On The Business

At the most recent meeting of the She Owns It business group, the owners discussed succession planning. The topic is of particular interest to Susan Parker, owner of Bari Jay. She and her sister, Erica Rosenfeld inherited Bari Jay from their father, Bruce Cohen, who had never created a formal succession plan. In fact, neither of his daughters knew he planned to leave the company to them.

Passing on a business takes a lot of thought and consideration.  You have to think differently about how you are going to pass the business along, such as through the family or making other arrangements. So in addition to planning for your estate, you must plan for the business succession.

What if you do not make plans for your estate or the business? Well, it gets messy. Generally, matters default to the probate court to sort things out. Sometimes this sorting depends on dusty state laws of “intestate succession” that provide a one-size-fits-all plan of distribution based on your “degrees” of family relationships.

In the absence of proper legal planning, the question likely is whether the family (let alone business) will survive the process. For more on this subject, you might want to read a recent article in The New York Times titled “Surviving a Succession Without a Plan.”

The original story is, in many ways, a happy one. The family rises up to reclaim the business and it returns. That said, it is a story of two sisters. While these were very capable sisters, they were never brought up in the business or with the goal of running the business. To save the business, however, these sisters had to fight through an inter-family conflict, a rebellious employee and even a downward dive into the red before finally taking over and saving the business.

Unfortunately, the sisters could have been spared all of this anguish had their father simply created a succession plan.

Reference: The New York Times – You’re The Boss (June 25, 2013) “Surviving a Succession Without a Plan”

Holden & Campbell, LLC - Annapolis Estate Planning Attorneys

Annapolis Estate Planning: Business Succession Through Incentive Trusts

We introduced an approach to trust drafting that would encourage financial literacy through provisions that are clear, objective, and correlated with the beneficiary’s ability to manage money responsibly.

The prospect of whether or not a family business will survive after the owner passes is questionable. And although the statistics regarding succession of family business to heirs can be disconcerting, there is hope out there in the form of trusts.

This matter was addressed in a recent article in the Journal of Financial Planning titled “Investing in Future Generations: Evolution of the Business Skills Trust.”

First, the troubling statistics: “Less than one-third of family businesses survive the transition from the first to the second generation, and only about 10 percent survive the transition to the third generation, according to stats reported in the Harvard Business Review.” While wealth can be transferred through a bit of effort on the planning side, it is not the same as transferring the motivation and the ability to pull it off thereafter.

How can a trust help with motivation and to train up ability? That depends on how you frame the trust and the conditions you set to slowly bring a beneficiary/heir up to speed. The original article has some very specific advice, but the main point is that incentive-based trusts are a powerful tool.

If you have a business that needs to be run, and a legacy to leave behind, then you could do well with an incentive trust plan. So, what values do you enshrine in the trust and how do you offer incentives? The answers to these and other salient questions are specific to each and every situation and family.

Reference: Journal of Financial Planning (June 2013) “Investing in Future Generations: Evolution of the Business Skills Trust”

Holden Campbell, LLC - Annapolis Estate Planning Attorneys

Annapolis Estate Planning: The Family Farm: Tractors, Cows …and Estate Plans?

The "graying tsunami" in rural America means that more farmers are being forced to decide what happens to their farm once they retire or die. If they decide not to sell the business, the farmer must decide how to divide up the operation among the remaining relatives, many of whom are not farmers.

Estate planning is simply essential to farmers and the family farm itself – just as important as the equipment, livestock, or crops involved. Unfortunately, estate planning is too easily overlooked with all of the day-to-day work to be done.

A recent article in USA Today, titled “As farmers age, planning for the future of their business grows,” explored this common problem.

Land is one of those things that seldom loses value. Agriculture, by definition, requires land (and lots of it) to operate on a profitable scale these days. Consequently, modern farms find themselves racking up a potentially hefty future estate tax bill on the basis of their land values alone.

Problem: When the land value represents the lion’s share of the estate value itself, then what happens when the estate tax bill comes due with only the land to pay the tab? Selling the farm would be akin to killing the goose that lays the golden eggs for the farming family. To make matters worse, the owners of family farms are getting up in years, and so time is of the essence when it comes to making plans to save these family farms.

The good news is that today, unlike for much of the last half decade or so, we have fairly firm estate and gift tax laws. Therefore, farmers and their advisors can make estate plans based on more than gut and intuition.

So, how do you pass on the family farm? Even more important, how will you pass it intact and who will run it after you do? These are questions that need an answer, sooner rather than later.

Reference: USA Today (May 19, 2013) “As farmers age, planning for the future of their business grows

Holden Campbell, LLC - Annapolis Estate Planning Attorneys

Annapolis Estate Planning: Dodging the Family Feud over Your Estate

Unfortunately, estate planning can cause family feuds over inheritance, often leading to litigation that can become lengthy and costly with no clear winner. From our experience, family litigation occurs not from a lack of trying to solve the issue, but from a lack of planning.

Planning for your estate translates to planning for your family. Or is it planning for your family?

Well, it really means both – “planning for your family” (i.e., ensuring your family’s well-being financially) and, more subtly “planning for your family” (i.e., ensuring your family’s well-being relationally).

You see, family infighting is a very real and present danger, even within families that are otherwise loving and respectful. Death and the resulting inheritance are fraught with emotional danger. How do you plan to avoid the family feud?

Families are simply too complex to offer any silver bullet suggestions (each family is the sum total of each family member’s hopes, dreams, anxieties, and often petty obsessions).  However, estate planning attorneys have ways to prevent estate litigation.

Each attorney may have his or her own choice list of tactics. However, WealthManagement.com
published a list worth consideration in an article titled “Avoiding Family Conflicts During Estate
Planning.”

The original article is worth reading, but here is the list of bullet points in summary:

• Overcome the Concept of Fairness
• Transfer Assets Based on a Natural Flow
• Protect Family Assets
• Make Major Decisions with Every Family Member in the Room
• Do Not Wait for the Original Founder of the Family Business, or a Parent, to Pass Away
• Evaluate What You Can and Can’t Afford to Transfer
• Treat Estate Planning as an Ongoing Process
• Pick the Right Professional Advisor

It’s worth reading through the list and a few more like it.

What does your family need and how will you plan “for your family” to head off squabbles, infighting, or outright litigation?

Reference: WealthManagement.com (May 15, 2013) “Avoiding Family Conflicts During Estate Planning”

Holden Campbell, LLC - Annapolis Estate Planning Attorneys