Wealth Planning and Succession Wealth Management & Succession Planning … · 2014-10-07 · The...

March 29, 2010 Page A1www.sdbj.comWealth management & SucceSSion Planning SuPPlement

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Wealth Planning and Succession

Wealth Management & Succession Planning

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Page A2 www.sdbj.com Wealth management & SucceSSion Planning SuPPlement March 29, 2010


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A Letter From the PublishersWelcome to the inaugural Wealth Management and Succession Planning Supplement.

Who could have imagined the market upheaval of the past few years and its impact on family and closely held businesses? Exit planning, or passing a family business along to the next generation, requires skill in good economic times. It requires even more finesse while navigating challenging economic waters.

In these pages you will find experts who can speak to succession planning from legal, tax and other perspectives — perhaps introducing points of view you may not have considered. Our thanks go out to the CPA firm of Hutchinson and Bloodgood LLP, the law firm of Luce Forward Hamilton & Scripps LLP, and Wells Fargo Private Bank for offering their experts to speak on these matters.

You may find that the information here addresses your financial situation generally, but comes up short on specifics. Consider these experts as resources who are willing to learn more about your personal situation and offer their advice. Contact information is listed as a part of each article.Wealth management and succession planning are by no means simple. But the right help can make them easier.

And at the end of the day, we hope you will be able to enjoy the fruits of all your hard work.

Sincerely,

Reo CarrEditor-in-ChiefSan Diego Business Journal

Armon MillsPresident and PublisherSan Diego Business Journal

The Estate Planning Council of San Diego is an interdisciplinary orga-nization for experienced and reputable professionals involved in estate planning. Since its inception, the Council’s primary objective has been to provide a better understanding of the services performed by attorneys, life underwriters, trust officers, accountants, financial advisors, planned giving professionals and others substantially involved in estate planning and to promote cooperation among them.

Our meetings provide a medium for discussion of various, up-to-date estate planning topics of common interest. In addition to the excellent educational information and technical content, our meetings afford our members the opportunity to network, meet old friends and make new ones within the San Diego professional community.

EstatE Planning CounCil of san DiEgo

For more information on the Estate Planning Council, please contact Teresa Lass at [email protected].


By Laura Stansberry Regional Managing Director, Wells Fargo Private Bank

OnbehalfofWellsFargoWealthManagementGroup,wearehonoredtoco-sponsortheWealthManagementandSuccessionPlanningSupplement. Consideringwherewestandwiththecurrenteconomiccycle,changinglegislationandotherfactorsaffectingyourwealth,thereisnotimelikethepresenttoaddresswealthmanagementandsuccessionplanning.WeapplaudTheSanDiegoBusinessJournalfortakingtheleadonthisissue. Wealthmanagementtodayhasbecomecomplicatedand

timeconsumingforanyonetryingtoachievehisorherfinancialandlifegoals.Likemanypeople,youmayfeeloverwhelmedandunsureaboutthechoicesbeforeyou.Weencourageyoutonotdoitalone.Inthesamewayyouhireprofessionalstohandleotherareasofyourlife,youcansimplifyyourlifebyworkingwithexperiencedwealthmanagerstoassistyouinmeetingyourwealthmanagementandbusinesssuccessiongoals. Whetheryouareintheprocessofbuilding,managing,preservingortransitioningwealth,weanticipatethatthissupplementwillprovideyouwithexcellentinformationandresources.Ittakesatruepartnershiptoachieveyourgoals. Apartnershipwiththeinvolvementofyou,yourtrust,banking,investmentandwealthadvisorsaswellasyouraccountant,lawyerandinsuranceadvisor.

Wealth Management: Don’t Go It Alone

Letters From the Sponsors

By Kurt Kicklighter Managing Partner, Luce Forward

Wealthmanagementandbusinesssuccessionplanningaretwoofthemostpowerfultoolsanindividualcanemploytoprotecthisorhersizeableassetsfromtaxesandthirdparties.Whiletheyoftenoverlap(formostfamilybusinessowners,thebusinessrepresentsthemostvaluableassetintheowner’sestate),bothwealthmanagementandbusinesssuccessionplanningareuniqueandcomplicateddealingsthatshouldbeaddressedwithoutdelay.Itisessentialforindividualsundergoingthearduousprocessofplanningforthefuture

toretaincounselwithathoroughunderstandingofthebusinessandpersonalissuesdistinctivetobothmulti-generationalfamilybusinessesandentrepreneurs. AtLuceForward,ourFamilyWealthandExemptOrganizationspracticehandlesbothwealthmanagementandbusinesssuccessionplanning.Ourlawyerscounselfamiliesandindividualsintheirpersonal,financialandbusinessdealings,designsimpleandcomplexestateplans,solvesophisticatedtaxproblemsandidentifyandsettleissuesinestateandtrustadministration.Inaddition,ourBusinessSuccessionPlanninggroupassistsindividualsinpreparingfortheorderlytransferofabusinesstothenextgeneration,avoidingliquidationandunnecessarytaxes. Bytakingstepstoensurebusinesses,assetsandfamiliesareappropriatelymanagedtoday,individualscanlookforwardtoastabletomorrow.

An Arduous Process, But a Goal Worth Attaining

Kurt Kicklighter

By Tanya Lee Scott, CPA Partner, Hutchinson and Bloodgood LLP

Overtheyears,wehavefoundacommonresponsefromourbusinessownerclientswheneverweinquiredastotheirtimelineforleavingthebusiness.“Oh,itwillbethreetofiveyearsfromnow,”ourbusinessownerswouldreply. Theinterestingthingabouttheirresponsesisthatitremainsexactlythesamewhen–threeyearsdowntheroad–weaskagainabouttheowner’sexittimeline.Thetargetalwaysseemstobethreetofiveyearsaway!

Doesthetargetcontinuetomovebecausethebusinessownerlikesworkinginthebusinesssomuchthatheorshedoesn’twanttoleave?Sometimes.Butthemorelikelyculpritisthatthebusinessownerissobusyfightingthedailyalligatorsofrunningabusinessthatheorshedoesn’ttakethetimetodraintheswamp.Whenallthetimeandenergyisspentworkinginthebusiness,thereislittletimelefttoworkonthebusinessofleavingthebusiness! HutchinsonandBloodgoodLLPiscommittedtohelpingbusinessownersdefinewhatasuccessfulexitlooksliketothem,andthenworkingwiththebusinessownerandtheirotheradvisorstoensurethatthedefinedexitisachieved.

The Exit: Just Over the Horizon

Tanya Lee Scott

Laura Stansberry


By Marc Doss, Regional Investment Manager, Wells Fargo Private Bank

Each week, nearly 30 pieces of domestic economic data are reported and analyzed endlessly – some of this data may be significant and market moving, but most is just noise. Add on the around-the-clock commentary from cable networks programming, and you can see why investors face extreme information overload when it comes to their personal finances. At Wells Fargo Private Bank, we encourage our clients to tune out the noise by focusing on an investment plan that reflects their long-term financial goals, time horizon for those goals and their tolerance for risk.

Prognosis for U.S. Economy

The economy appears to have finally stabilized, aided by successful government stimulus programs and an increase in restocking and export activity. In our view, it is likely to continue its modest recovery in 2010. Because companies allowed inventories to sink to unprecedentedly low levels, rebuilding the supply chain will probably drive growth in the first phase of the recovery. In addition, the weak dollar is helping drive

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S A N D I E G O • S A N F R A N C I S C O • L O S A N G E L E S • O R A N G E C O U N T Y • C A R M E L V A L L E Y / D E L M A R • R A N C H O S A N T A F E

today’s strategy. tomorrow’s success.

Plan now for long-term success. Luce Forward's Family Wealth and Exempt Organizations (FWEO) practice emphasizes all aspects of tax and estate planning, estate and trust administration, and tax-exempt charitable matters. Our attorneys have considerable planning and implementing strategies to minimize global taxation.

The FWEO practice group also specializes in sophisticated planning for family businesses, including structuring and implementing intra-family sales, buy-sell agreements and family business succession planning.

Our multidisciplinary custom-tailored approach gives you the best of all possible worlds. We can help you design a plan to strengthen, secure, and grow your business so it can thrive for generations to come.

When necessary, we also possess the experience and resources to handle complex trust, estate, conservatorship and guardianship disputes and litigation.

Carol Kao | 619.699.2540 | [email protected]

Mary Gillick | 619.699.2459 | [email protected]

Business Succession Planning

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Preparing Your Portfolio for RecoveryBy Marc Doss Regional Investment Manager, Wells Fargo Private Bank

Eachweek,nearly30piecesofdomesticeconomicdataarereportedandanalyzedendlessly.Someofthisdatamaybesignificantandmarketmoving,butmostisjustnoise.Addonthearound-the-clockcommentaryfromcablenetworksprogramming,andyoucanseewhyinvestorsfaceextremeinformationoverloadwhenitcomestotheirpersonalfinances.AtWellsFargoPrivateBank,weencourageourclientstotuneoutthenoisebyfocusingonaninvestmentplanthatreflectstheirlong-termfinancialgoals,timehorizonforthosegoalsandtheirtoleranceforrisk.

Prognosis for the U.S. Economy

Theeconomyappearstohavefinallystabilized,aidedbysuccessfulgovernmentstimulusprogramsandanincreaseinrestockingandexportactivity.Inourview,itislikelytocontinueitsmodestrecoveryin2010.Becausecompaniesallowedinventoriestosinktounprecedentedlowlevels,rebuildingthesupplychainwillprobablydrivegrowthinthefirstphaseoftherecovery.Inaddition,theweakdollarishelpingdrivestrongexportgrowth,whilesoftconsumerdemandhasslowedimports,suggestingthatnettradealsomaydriveeconomicgrowthin2010.Highconsumerdebtlevelsandunemployment,however,arelikelytolimitanysignificantpickupingrowthfortheyear.Thesefactorscombinedwithahighlevelofunderutilizedproductioncapacityarelikelyhelpcontaininflationarypressuresandkeepinflationrelativelylowintheshortterm. Overthelongerterm,however,wedoseeapotentialriskfromarisingrateofinflationandincreasinginterestratesasaresultoftheweakdollarandthegrowinggovernmentdeficit.Althoughinflationandrisinginterestratesdonotappeartobeimminentthreats,asaninvestoryoushouldstillpreparefortheseriskswellinadvance.Wesuggestyouevaluatetheduration,orinterestratesensitivityofyourbondportfolio,withtheobjectiveofreducingtheoveralldurationoverthenextfewquarters.Thismayhelptomitigatethenegativeeffectsofrisingratesonfixedincomeinvestments.Inaddition,usinginternationalbondsprovidesglobalcurrencydiversificationtoyourfixedincomeportfolio.Furthermore,webelievethatawelldiversifiedportfoliowithanappropriateassetallocationforyourspecificcircumstanceswillbeveryimportantinthischangeablemarketenvironment.

Asset Allocation Is Not Dead

Tothosewhosayassetallocationdoesn’twork,werespondwiththis:Althoughassetallocationcannotprotectyourportfoliofromlossesorguaranteebetterperformance,investorswhoremainedfullydiversifiedmayhaverealizedbetterreturnsthanthosewhowereonlyinvestedinstocksoverthepastdecade.Overthepast10years,theS&P500Indexshedmorethan10percent.However,basedonourcalculations,well-diversified

investors,havingallocatedtheirassetswithinandacrossstocks,bonds,realassetsandcomplementaryassetsmaypotentiallyhaverealizedrelativelystrongreturns.Yourlong-termallocationshouldbewell-diversifiedacrossandwithinthefourmainassetclassesofstocks,bonds,realassets(includingrealestateandcommodities)andcomplementaryassets,suchashedgefundsandprivateequity.

Potential Opportunities Overseas

Tobeasuccessfulinvestoroverthenextdecade,it’scriticalforinvestorstothinkglobally.Thesynchronizedglobaldownturnwe’vejustexperiencedservedtoimprovemanyoftheeconomicimbalancesthathadbeenbuildingforyears.Thismeanslivingstandardsinthedevelopedworldarelikelystabilizing,albeitatrelativelyhighlevels,whilemanyintherestoftheworldcontinuetostrivetowardhigherlivingstandards.Meanwhile,theemergingworldisbeginningaverylongprocesstowarddevelopingbetterlivingconditions.Infact,inemergingmarkets,nominalconsumerspendingnowexceedsspendingintheU.S.Eventually,wesuspectthatconsumerspendingislikelytoriseinmanyemergingmarkets,boostingdemandforgoodsandservicesproducedintheU.S.,andtheU.S.willplayalargeroleinthefutureofglobaltrade. Basedonthesetrends,aportfolioinvestedinafewdomesticallyfocusedS&P500stocksisnolongeradequateorprudent.Westronglysuggestthatportfoliosincludesomecommitments,appropriatelyallocatedbasedonyourpersonalfinancialsituation,todevelopedandemergingcountries’economies.Althoughpastperformanceisnoguaranteeoffutureresults,globalmarketshavebeenexceptionallystrongoverthepastyear.Andevenwiththisstrongperformance,manymarketsarestillattractivelyvalued.

There Is No ‘All Clear’ Signal

EventhoughfinancialmarketshaverecoveredconsiderablyfromtheirMarch2009low,manyinvestorscontinuetowaitforsometypeof“allclear”signinthemarketsbeforetheycommitmoreassets.Theyarewaitingforthemarketstotellthemthatit’snowsafetoinvest.Unfortunately,thepathofaneconomicandmarketrecovery,particularlyonefromsuchadeeprecession,ishardtoanticipate,sothereisunlikelytobeanyclearsignal.Whatyoushouldkeepinmindiswhereyourinvestmentsareinrelationtoyourlong-termgoalsandwhetheryourcurrentassetallocationislikelytokeepyouontracktomeetthosegoals.Rememberthatyoumaystillhavemanyofthesamefinancialgoalsthatyouhadbeforethemarketturmoilbegan.Makingadecisiontomeetregularlywithyourfinancialadvisor,whocanhelpyoustayfocusedonyourgoalsandlendyouasenseofperspective,isthebestresolutionyoucanmakeforyourportfolioandyourfinancialfuture.

An advertorial submitted by Wells Fargo Private Bank. Marc Doss is a regional investment manager for Wells Fargo Private Bank in San Diego. He can be reached at 858-597-4420 or [email protected].


THE EMC BUSINESS FORUM IS PROUD TO PRESENT

H P W WFeaturing Garry Ridge

— CEO of

May 12th 20104:00 –7:00

M V M

EMC Business Forum members: No charge.Non-members: $55. Seats are limited and the

first 20 people who register will get a of Garry Ridge’s new book, Helping People Win at Work.

Please register by Friday, May 7th at: www.sdsu.edu/emc

S I: Comerica Bank • Ernst & Young, LLPMoss Adams, LLP • Sheppard Mullin Richter & Hampton, LLP Vantage Point Advisors, Inc. • Keith Eck Financial

M P: KPBS • San Diego Business Journal

P I: L I:

By Tanya Lee Scott, CPA Partner, Hutchinson and Bloodgood LLP Haveyoueverwonderedwhyonebusinesshasbuyerslinedup,willingtopaytopdollar,whileanothersitsonthemarketformonths,orevenyears?Whatdobuyerslookforinaprospectivebusinessacquisition?Thecharacteristicsbuyersseekmustexistbeforethesaleprocessevenbegins.Itisyourjobastheownertocreatevaluewithinyourbusinesspriortothesale. Tounderstandtheimportanceofvaluedriverswhenpreparingtosellyourbusiness,youneedtoputyourselfinthebuyer’sshoesforaminute.Here’sahypotheticalcasestudythatcomparestwosimilarcompanieswithadifferentemphasisonvaluedrivers: TheAFactorCompanyhascashflowsof$1millionandanownerwhorunsthebusiness,systemsandprocessestocreategrowth.Thecompanydoesn’thavearealmanagementteaminplaceandthemajorityofsalesaregeneratedbytheowner.Theowneristhecenterpointofthecompany,holdingboththeCEOandchieffinancialofficerpositions.Withthislevelofresponsibility,theownerisburningoutquickly. TheBFactorCompanyhascashflowsof$1millionandasolidmanagementteamthatrunsthebusiness,systemsandprocesses.Themanagementteamcreatesefficiencieswithinthebusinessandtheownervacationsforsixweeksayear. Ifyouwerethebuyerthinkingofpurchasingoneofthesecompanies,whichsituationwouldprovideamoreattractivebusinessopportunitytoyou?Howmuchmorewouldyoupayforabusinesswithvaluedriversinplacesuchasastrongmanagementteam? Investmentbankersinthemarkethaveseenthatwithoutvaluedriversinplace–suchasastrongmanagementteam

–sellersreducethepotentialbuyermarketbymorethan75percent.Withvaluedriversplayingsuchanimportantroleintheoverallsaleofabusiness,let’stakealookatthefollowingvaluedriversthatarecommontoallindustries: Astableandmotivatedmanagementteam.Ifyoudon’tplantosellyourbusinessforatleastayear,thenyoumaywanttoestablishanincentivecompensationsystem,cash-orstock-based,thatrewardskeyemployeesbasedoncompanyperformance(usuallymeasuredbyincreasesinpretaxincome).Sophisticatedbuyersknowthatifasolidmanagementteamisinplace,prospectsaregoodforcontinuedbusinesssuccess.Ifastrongmanagementteamdoesn’texist,itmaybeverydifficulttosellyourbusinesstoathirdpartyortransferittoaninsider. Operatingsystemsthatimprovesustainabilityofcashflows.Operatingsystemsincludethecomputerizedandmanualproceduresusedinthebusinesstogenerateitsrevenueandcontrolexpenses(i.e.createcashflow),aswellasthemethodsusedtotrackhowcustomersareidentifiedandhowproductsorservicesaredelivered.Theestablishmentanddocumentationofstandardbusinessproceduresandsystemsdemonstratetoabuyerthatthebusinesscanbemaintainedprofitablyafterthesale. Asolid,diversifiedcustomerbase.Buyerswilltypicallybelookingforacustomerbaseinwhichnosingleclientaccountsformorethan10percentoftotalsales.Adiversifiedcustomerbasehelpsinsulateacompanyfromthelossofanysingleclient.Ifyoufindthemajorityofyourcustomerbaseconsistsofonlyoneortwogoodcustomers,itisimportanttoconsiderreinvestingyourprofitsintoadditionalcapacitythatwillmakedevelopingabroadercustomerbasepossible. Arealisticgrowthstrategy.Buyerstendtopaypremiumpricesforcompanieshavingarealisticstrategyforgrowth.Evenifyouexpecttoretiretomorrow,itmakessenseto

haveawrittenplandescribingfuturegrowthandhowthatgrowthwillbeachievedbasedonfactorsincluding:industrydynamics,increaseddemandforthecompany’sproducts,newproductlines,marketplans,growththroughacquisition,andexpansionthroughaugmentingterritory,productlinesandmanufacturingcapacity.Itisthisdetailedgrowthplan,properlycommunicated,thathelpstoattractbuyers. Effectivefinancialcontrols.Financialcontrolsarenotonlyacriticalelementofbusinessmanagement,buttheyalsosafeguardacompany’sassets.Mostimportantly,however,effectivefinancialcontrolssupportaclaimthatacompanyisconsistentlyprofitable.ThebestwaytodocumentthatthecompanyhaseffectivefinancialcontrolsandthatitshistoricalfinancialstatementsarecorrectisthroughacertifiedauditorperhapsafinancialstatementreviewedorcompiledbyanestablishedCPAfirm. Stableandimprovingcashflow.Ultimately,allvaluedriverscontributetostableandpredictablecashflow.Itisimportant,especiallyintheyearorsoprecedingthesaleofthebusiness,thatcashflowbesubstantialandonanupswing.Youcanbeginincreasingcashflowtodaybysimplyfocusingonwaystooperateyourbusinessmoreefficientlybyincreasingproductivityanddecreasingcosts. Byincreasingyourknowledge,byworkingwithatrainedexitplanningprofessionaland,mostimportantly,bythinkingaboutwhatthebusinessneedstobecomemorevaluable,youcanputintoplacetheelementsnecessarytodrivethevalueofyourbusinessupwardandpositionyourselftogetapremiumpriceforyourbusinessuponyourexit. An advertorial submitted by Hutchinson and Bloodgood LLP. Tanya Lee Scott, CPA, is a partner at Hutchinson and Bloodgood LLP in San Diego and is a member of Business Enterprise Institute’s Network of Exit Planning Professionals. She can be reached at 619-849-6529 or [email protected].

Creating Value to Get Top Dollar Upon Your Exit


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Planning for Succession at Death By Michelle B. Graham and Jeremy Crickard Partners, Luce Forward

Ifyouaretheownerofacloselyheldbusiness,deathisoftenthelastthingonyourmind.However,failingtoplanfordeathcannegativelyimpactthefutureoperationandsuccessofyourbusiness.ItcanalsoprovideanunintendedbenefitfortheInternalRevenueService.Finally,notdecidingwhowillsucceedyouinyourbusinessthroughproperplanning

couldresultinyourbusinessbeingownedbypeoplewhoarenotsuitedorintendedtobeowners.Incontrast,planningforsuccessionofyourbusinessinadvancecaneasethetransitionandpotentiallyprovideconsiderabletaxsavings.Ataminimum,properestateplanningshouldbedonetoindicatewhoshouldinherityourbusinessatyourdeath.InCalifornia,thisiscommonlydonebymeansofalivingtrust.Muchlikeawill,alivingtrustallowsyoutodesignatewhoinheritsyourassets.Livingtrustshaveanadvantageoverwillsbecause,ifproperlymanagedandfunded(namely,ownershipofyourbusinessistitledinthenameofthetrust),theyallowanindividual’sestatetoavoidprobate.InCalifornia,theprobateprocesscanbetime-consumingandcostly.Thoughitusuallyrequiresaprobate,awillatleastdesignateswhoshouldinherityourestate.Ifanindividualdieswithoutawillortrust,hisorherassetswillpasstotheindividualsdeterminedundertheCaliforniaintestacylaws.Theseindividualsmayormaynotbethepeopleyouwouldhavechosentosucceedyouintheownershipofyourbusiness.Trustsareveryflexibleandcanbedraftedtoachievebothyournon-taxandtaxobjectives.Thetermsofthetrustcan

havethebusinessinterestheldintrustforaparticularperson’sbenefit,suchasyourspouseorminorchild,foratermofyearsortheirlifetimes.Atrustallowsyoutodesignateatrusteewhowillbethepersonresponsibleformanagingthetrust’sassetsuponyourdeathorincapacity.Theselectionofthetrusteeshouldbeconsideredcarefully,andit

mayevenbedesirabletonameaspecialtrusteetomanagethebusinessinterest.Inadditiontobasicestateplanning,wherethereareormaybemultipleownersofabusiness,itisgenerallyadvisabletoenterintoabuy-sellorstockrestrictionagreementbetweenalloftheowners.Suchanagreementoftenprovidesmechanismsforsuccessionofanowner’sinterestinthebusinessuponhisorherdeath.Commonly,thisincludesprovidingthesurvivingownersofthebusinesswiththerighttopurchasethedeceasedowner’sshares,whichallowsthesurvivingownerstheoptiontoavoidtakingonanewpartnernotoftheirchoosing.Suchagreementsmayalsoprovideforamandatoryrepurchaseofthedeceasedowner’sshares,whichcanprovidethedeceasedowner’sfamilywithliquidityneededfortheirfuturewelfare.Itmaybeadvisabletoconsiderhavinglifeinsuranceonthelifeofeachbusinessownersothatthereiscashavailabletobuyoutthedeceasedowner’sinterestuponhisorherdeath.Similarprovisionscanbeincludedtodealwithothereventssuchasthedivorce,bankruptcyordisabilityofanowner.Suchagreementsallowbusinessownerstoplanforpossibleeventsthatmayimpactownershiporparticipationinthebusinessbeforesucheventsoccur,atwhichtimeoneormorepartiesmaybeatadisadvantage.Abuy-sellagreementmay

beofconsiderableusewherethebusinessownerdesirestotransferhisorherbusinessinteresttoakeyemployeeorfellowbusinesspartner.Whenyouhaveenteredintoabuy-sellorstockrestrictionagreementwithyourbusinesspartners,yourtrustshouldincludespecificprovisionsthatreferencethebuy-sellagreementandrequirethatthetrusteeabidebythetermsofsuchagreement.Formanycloselyheldbusinessowners,planningforbusinesssuccessionatdeathalsoinvolvesestatetaxconsiderations.Theestatetaxmaycreateparticularproblemsforbusinessownersbecausethebusinessoftenconstitutesalargepercentageoftheowner’snetworth.Whenthisisthecase,theremaynotbesufficientliquiditytopaytheestatetax.Withoutproperplanningtoaddresspaymentofpotentialestatetax,thefamilymemberswhosurvivemaybeforcedtosellthebusinesstopaytheestatetax.Aforcedsalecanbeavoidedthroughproperplanning,whichmayinvolvetheuseofabuy-sellagreement,lifeinsuranceorboth.Inaddition,iftheownershipofthebusinessisproperlystructuredinadvance,thedeceasedowner’sestatemayqualifytodefertheestatetaxliabilityoveraperiodofyears.Insummary,properplanningwithyourlegalandtaxadvisorsforthesuccessionofyourbusinesscanfacilitatethetransitionofthemanagementofyourbusiness,protectyourfamily’sfinancialfuture,avoidunnecessarycostsandtimedelaysofprobateandminimizeanypotentialestatetaxburden.Incontrast,theabsenceofproperplanningcanjeopardizethefutureofyourbusinessandthefinancialsecurityofyourfamily.

An advertorial submitted by Luce Forward. Michelle B. Graham is a partner at Luce Forward. Michelle Graham can be reached at 858-381-8040 or [email protected]. Jeremy Crickard is a partner at Luce Forward. Jeremy Crickard can be reached at 858-381-8035 or [email protected].

Estate Planning for the Business Owner, Part I

Michelle B. Graham

Jeremy Crickard

Lifetime Transfers

By Michelle B. Graham and Jeremy Crickard Partners, Luce Forward

Theprimaryfocusofmostcloselyheldbusinessownersisongrowingtheirbusinessandincreasingprofitability,aswellitshouldbe.However,thereisnoescapingtherealitythatatsomepoint,theownershipofthebusinesswillbetransitionedtothenextowner,whetherthesucceedingpartyisafamilymember,employeeorthirdpartypurchaser.Commonly,businessownersdesiretotransitiontheirbusinessestooneormorefamilymembers.Whiletransferringownershiptofamilymemberscanbeaccomplishedatdeath,thereareoftenbusinessandtaxadvantagestolifetimetransfers.Ingeneral,thereareseveralwaystomakelifetimetransfersofownershipinterests.Eachhasitsownadvantages.Oneoptionistogiftsmallinterestsinyourbusinesseachyear.Undercurrenttaxlaws,youcantransferuptotheannualexclusionamount(currently$13,000perdoneeperyear)withoutbeingsubjecttoU.S.gifttaxorutilizinganyofyourlifetimegiftingexemption(currently$1million).Formarriedindividuals,yourspousecanalsomakeannualexclusiongifts.Wheretheinterestgiftedisaminorityinterestinacloselyheldbusiness,thevalueofthetransferredownershipinterestisoftenreducedtoaccountforthefactthattheinterestisaminorityinterestthatlikelyhaslittlemarketability.Becausetheannualexclusionamountisrelativelysmall,thismethoddoesnottransfersignificantamountsofwealthorownershipinanygivenyear.However,dependinguponthenumberoffamilymembersreceiving

ownershipinterests,overtimethisstrategycanprovidesignificanttransfertaxsavings.Thenextstepuptheladderisgiftsinexcessoftheannualexclusionamount.Eachindividualcurrentlyhasa$1milliongifttaxexemptionavailableforlifetimegifting.Giftinginterestsinyourbusinessallowsyoutoavoidtransfertaxontheappreciationofthetransferredinterestinthebusinessthatoccursafterthegift.Thus,giftinglargeramountsmaybeadvisablewhereconsiderablefutureappreciationofthebusinessisexpected.Becauseofthereducedvaluethatoftenappliestogiftsofownershipinterestsincloselyheldbusinesses,lifetimegiftsmayaffordconsiderabletransfertaxsavings.However,valuationdiscountsforcloselyheldbusinessinterestsisanareaoffocusfortheInternalRevenueService,andthereforeanindividualconsideringagiftingstrategyshouldfirstconsultwithtaxorlegaladvisors.Manyofthetaxadvantagesoflifetimegiftingcanbeenhancedthroughtheuseofcertainadvancedgiftingstrategies.Onesuchstrategyinvolvestheuseofatrustknownasagrantorretainedannuitytrust(GRAT).AGRATisanirrevocabletrustestablishedbyanindividualwhotransfersaportionofhisorherbusinesstothetrust.Thetermsofthetrustrequirethatthetrustpaytheindividualanannuityoverthetermofyearschosenbytheindividual.Providedtheindividualsurvivesthechosenterm,theassetsremainingintheGRATpasstothebeneficiariesselectedbytheindividual,commonlytheindividual’schildrenoratrustfortheirbenefit.ThemainadvantageofaGRATisthatittransfersanyappreciationofthebusinessthatoccursduringthetermfreeoftransfertaxes,andoftenwithouttheuseofanylifetimegiftexemption.Dependingupontheappreciationofthebusinessinterestthatoccursduringthetermofthetrust,the

taxsavingscanbesubstantial.GRATshavebeenparticularlysuccessfulwheretheowneranticipatesthepossibilityofafuturesaleofthebusinessortakingthebusinesspublic.Oneadditionaltechniquefortransferringownershipinterestsinvolvessellingaportionofthebusinesstoachosenfamilymemberinexchangeforapromissorynote.Thenoteisthenrepaidovertime,oftenusingthedividendsornetrevenuereceivedfromthebusiness.Bysellingtheinterest,theownerisabletotransferanyfutureappreciationofthebusinessfreeofestateorgifttax.Wherethesaleinvolvesaminorityinterestinthebusiness,thepurchasepriceisgenerallyreducedtoreflectthemarketvalueoftheminorityinterest.Inaddition,becauseinterestratesareatrelativehistoriclowsrightnow,thechosenfamilymemberiscurrentlyabletofinancethepurchaseonfavorableterms.Wheredesired,thesalemayevenbestructuredinamannerthatallowsthesellingownertodefercapitalgainsonthesale.Astheseexamplesillustrate,therearemanyoptionsfortransferringyourbusinesstothenextgeneration,andmanyprovidethepotentialforconsiderabletaxsavings.Whilelikelyoneormoreoftheseoptionsmayyieldstrategicandtaxadvantagesformostbusinessowners,thebenefitsoflifetimetransferswillvaryforeachindividualandbusiness.Whichoptionsorcombinationofoptionswillberightforyoushouldthereforebediscussedwithyourestateplanningattorneyandtaxadvisors.

An advertorial submitted by Luce Forward. Michelle B. Graham is a partner at Luce Forward. Michelle Graham can be reached at 858-381-8040 or [email protected]. Jeremy Crickard is a partner at Luce Forward. Jeremy Crickard can be reached at 858-381-8035 or [email protected].

Estate Planning for the Business Owner, Part II


OPEN

Why Exit Planning?By Tanya Lee Scott, CPAPartner, Hutchinson and Bloodgood LLP

Morethanhalfoftoday’s9.5millionownersofestablishedbusinessesarereachingtheretirementageof50orolder.SosaysresearchfromAxiomValuationSolutions,suggestingitismorethanlikelythatmanyofyouwillbereadytoleaveyourbusinesswithinthenextdecadeorso.ADeloitte&Touchereportsuggeststhat71percentofsmallandmid-sizedbusinessownersplantoexittheircompanieswithinthenext10years.However,only22percentofyouhavereporteddoingagreatdealofsuccessionplanning,accordingtoareportfromPricewaterhouseCoopers.Sowhatareyouwaitingfor?Nowisthetimetoputplansinplacetoprepareyouandyourfamilyforoneofthebiggestfinancialeventsofyourlife!

The Exit Planning ProcessLeavingyourcompanyisaprocess.Ifyou’realreadytakingactiontoleaveyourbusiness,askyourselfifyouareapproachingyourexitinamethodical,logical,rationalmanner.Mostownersdonotundertakethenecessarythoughtandplanningthatunderpinsgoodownershiptransitionsbecausetheydon’tknowhowtobeginorexactlywhattoconsiderandanalyze.

Thegoodnewsisthatthereisaplanningandimplementationprocessthatcanprovidethatunderpinning.ThisExitPlanningprocessbeginswithunderstandingyourexitobjectivesandfinancialgoals.Onlythencanaproperexitpathbedesignedforyou,whetherasasaletoathirdparty,atransfertochildren,asaletoanemployeestockownershipplan,asaletoaco-owner,oranorderlyliquidation.Theprocessalso

compelsyoutoconsiderwhatwouldhappentothebusinessandtoyourfamilyintheeventofyourdeathorifdisabilityprecedesyourplannedexit.

Simplyknowingtheprocess,however,isinsufficient.Tosucceed,youneedawrittenplanthatsetsoutyourexitobjectivesanddocumentshowyouaregoingtoachievethoseobjectives.Inaddition,achecklistthatassignsresponsibilityforeachtasktobecompleted,setsadateforthetasktobecompleted,anddesignatesthepersonresponsibleforcompletingthattaskisextremelyuseful.

What Does It Take to Create an Exit Plan?YourExitPlanwillbegintobecreatedasyouanswereachofthefollowingquestionsaffirmatively:1.Doyouknowyourprimaryplanningobjectivesforleaving thebusiness,suchasdeparturedate?Incomeneeded toachievefinancialgoals?Towhomyouwanttoleavethe business?2.Doyouknowhowmuchyourbusinessisworthtoday?3.Doyouknowthebestwaytoincreasethevalueofyour ownershipinterest?4.Doyouknowhowtosellortransferyourbusinesssothat youmaximizeyourcash,minimizeyourtaxes,andreduce yourrisk?5.Doyouhaveacontinuityplanforyourbusinessifthe unexpectedhappenstoyou?6.Doyouhaveaplantohelpsecurefinancesforyourfamily iftheunexpectedhappenstoyou?

Thesequestionsarealmostmisleadinglysimple,butansweringthemrequiresthoughtandactiononyourpart.Andifyouarelikemanybusinessowners,youmayonlybeableto

answer“yes”toafewofthesequestions.Ifyouaregoingtosuccessfullyexityourbusiness,though,youmustbeabletosay“yes”toeachofthequestionslistedabove.

How do you begin?Asskilledandassuccessfulasmostbusinessownersare,theygenerallycannot—workingalone—createandexecuteanExitPlanaseffectivelyaswhentheyworkwithanadvisoryteam.Anattorney,CPAandfinancialorinsuranceprofessionalcanworkindependentlywiththebusinessownertocreateaneffectiveExitPlan.SuccessfulExitPlanningisamulti-disciplinaryeffortthatrequiresyouandyouradvisorstoworktogether.NooneprofessionpossessesthebreadthofknowledgenecessarytoadviseabusinessowneronthewidevarietyofExitPlanningissues.

You can substantially increase the likelihood of making a successful exit if you:

•UnderstandthatthereisaprovenExitPlanningprocess.•Committoseetheprocessthrough.•Documentyourdecisionsandcreateawrittenplan(and checklist).•Hireanexperiencedteamofprofessionalstohelpseeyou throughthisprocess.YourExitPlanningprofessional, attorney,CPA,financialandinsuranceprofessionalsshould morethanpayforthemselvesbyputtingmoneyinyour pocket.Iftheycannot,youhavethewrongteam.

An advertorial submitted by Hutchinson and Bloodgood LLP. Tanya Lee Scott, CPA, is a partner at Hutchinson and Bloodgood LLP in San Diego and is a member of Business Enterprise Institute’s Network of Exit Planning Professionals. She can be reached at 619-849-6529 or [email protected].

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By Ken Lako, Wealth Management Director, Wells Fargo Private Bank

Thefirstwaveofbabyboomershasturned60,andamongthemaresmall-businessownersthinkingabouttransitioningintoretirement. Ifyou’reinthatgroup,youknowthatthebusinessthathassupportedyouandyourfamilyforsomanyyearsmaynowbecomeavehicleforfundingyourretirementnestegg.Oritmaybealegacyyouwillpasstoyourheirs. Howdoyoufindoutwhatyourbusinessisworthandwhetheritwillbeenoughtofundretirementandlegacy?Alongwithyourhome,yourinvestmentportfolioandotherassets,yourcompanyisasignificantfactorinyournetworth–perhapsthemostsignificant.Youdon’twanttowaituntilyou’rereadytoretiretoestablishitsvalue.It’sbesttoknownowsothatyoucanplan. Indeterminingthevalueofabusiness,it’smuchmorethanthebookvalueofassetsminusliabilities.Youhavetoconsiderhowitsassetshaveappreciatedoverthelongtermandwhattheearningpowerofthatbusinesswillbeinthefuture. Otherfactorscanimpactvalueaswell. Forexample,thetypeofbusinessorindustryyourbusinessisincanimpactthevalue.Theindustrymaybeindecline,weakeningthepotentialsalepriceofthebusiness,oritmaybeontherise,strengtheningtheowner’spotentialforsale.Ifthemarketissaturatedwithcompetitorsorifyou’rethesolebusinessworkingtoserveaniche,thatcouldimpactyourvaluationaswell. Itmaybethattherealestateyourbusinessownsisjustas–ifnotmore–valuablethanthebusinessitself.Businessownersshouldreachouttoabusinessvaluation

professionalwhocanguidethevaluationprocessandconnectyouwithotherprofessionalswhocanhelpyouplanyourexitstrategy. Manyfinancialservicescompaniesprovidehighlyspecializedbusinessvaluationservicestohelppartnerships,familybusinessesandcorporationsplanforthetransitionorsaleofyourbusiness.Thesespecialistscanhelpyoudeterminethevalueofyourcompany’searningcapacity,marketability,goodwill,contracts,copyrights,reputation,cashflowandotherfactors.Andheorshecanhelpyoucompareyourcompany’svaluetothatofsimilarbusinesses. Whendeterminingthevalue,businessappraisersandpotentialbuyerswilllooktoseethatyourbusinessisinorder.Justlikegettingyourhousereadytosell,abusinessownershouldtakeahardlookatthebusinessand,ifnecessary,spruceitup. Thatmeans,amongotherthings,producingauditedfinancialstatementssothatpotentialbuyerswillbecomfortablewiththenumbers.You’llwanttomakesureyouhaveastrongmanagementteamsothatanewownercantakeoverwithoutworriesaboutcontinuityinthebusinessoperation. Youwanttopresentadiversifiedcustomerbase.Abusinessthathasjustonecustomerortwomaincustomersmaybeseenasagreaterrisktopotentialbuyers.Thatperceptionmaybringpotentialvaluedown. Byworkingwithareputablefinancialservicescompanyandanexpertbusinessevaluationprofessional,youcansortthroughtheseissuesandgetagoodideaofwhereyourbusinessstands. Ifyou’reababyboomerandabusinessowner,muchofyournetworthmaylieinyourbusiness.It’sagoodideatostarttheprocessofvaluingyourcompanynow,whetheryouplantosellsoonornot.

Knowingthevaluewillhelpyouplanyoursuccession.Evenifyourplanistopassthecompanydowntoyourheirs,knowingthevaluewillhelpyoudevelopstrategiesforhandingoffthebusinessinawaythatmitigatesthepotentialestateandgifttaxburdenonyourheirs. Becausemanybusinesseshavegonedowninvalue,itmayactuallybeagreattimetoconsidertransferringthebusinesstothenextgeneration.Manyestate-planningdevicesaredesigned,infact,to“freeze”thevalueofyourbusinessattoday’svalue,whiletransferringfuturegrowthtothenextgeneration.Othertransfertechniquesaredesignedtotakeadvantageoflackofmarketabilityand/oralackofcontrol(i.e.,minorityinterest)valuationdiscounts,allofwhichcanbecombinedtohelptoreduceprospectivetransfertaxes.Italsowillhelpyouinthatchancemomentwhenyougetacallfromapotentialbuyerwhoiswillingtobuynowandreadytomakeanoffer.You’llknowwhetherhisorherofferisintheballpark. Knowingthevaluemayalsohelpyouplanforwhentosell.Youmaydecidethatthevalueistoolowforwhatyouneedinretirement.Ayearortwomoremaygiveyouthetimetogetyourbusinessinshapeforahighersaleprice.Itmaybuyyoutimeandputyouinabettereconomiccyclewhenpricesarestronger. Formanyyears,thevalueofyourbusinesstoyouhasbeenimmeasurable.It’sbeentheculminationofyourlife’swork.Ithassupportedyouandyourfamily.Now,it’stimetoputavaluetoitsothatthebusinessyoubuiltcanhelpfundyourretirement.

Ken Lako is the wealth management director for Wells Fargo Private Bank in San Diego. He can be reached at 858-622-6704 or [email protected].

Putting a Value on Your Business


Wells Fargo Private Bank provides financial services and products through Wells Fargo Bank, N.A. and its affiliates. Wells Fargo Investments, LLC (member SIPC) provides brokerage services. Insurance products are available through Wells Fargo Investments, LLC (California license #OD26865) or licensed affiliates. Wells Fargo cannot provide tax advice. Please consult your professional tax advisor to determine how this information may apply to your own situation.

©2010 Wells Fargo Bank, N.A. Member FDIC.

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by unbiased research, giving you clear insight into all of our

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Comprehensive asset allocation and risk tolerance profiling ensure

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