Planning After ATRA: The CPA’s Guide to - aicpa.org After ATRA: The CPA’s Guide to Financial and Estate Planning Business Succession Planning Presented by: Steven G. Siegel, JD,

Planning After ATRA: The CPA’s Guide to

Financial and Estate Planning

Business Succession Planning

Presented by:

Steven G. Siegel, JD, LLM

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Personal Financial Planning Section

Introduction

About the PFP Section & PFS Credential

• The AICPA PFP Section provides information,

resources, advocacy and guidance for CPAs who

specialize in providing estate, tax, retirement, risk

management and investment planning advice to

individuals and their closely held entities

• The CPA/Personal Financial Specialist (PFS)

credential distinguishes CPAs as subject-matter

experts who have demonstrated their financial

planning knowledge through experience, education

and testing

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Introduction

Steve G. Siegel, JD, LLM

The Siegel Group

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Agenda

Intrafamily business transfers

Giving the business to family members

Entering into a buy-sell agreement

Selling the business to third parties

Special considerations

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Intrafamily Business Transfers

People, Property, Process, Pitfalls and Plaintiffs

Key Elements in the Planning Process

Some Realities of Family Business Succession

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Give the Business to Family Members

Recognize the Difficulties of Transferring a Family

Business Through Multiple Generations • Is There a Succession Plan?

• Has the Business Owner Diversified His or Her Assets?

Address the Value of the Business • “Fair market value” of a closely-held business is the price that a willing buyer

and a willing seller would agree upon.

• Appraisals by independent, certified third parties are highly recommended. Book

value is not an acceptable measure of the value of a business.

• Consider valuation discounts: minority interest, lack of marketability, built-in

capital gain

• Family control is disregarded in applying minority interest discount for lack of

control.

• “Defined value gift” may be used to lock in a value without committing to a

number of shares, units, etc. being transferred.

• Recognize that valuation is one of, if not the prime audit topic when a closely-

held business is transferred.

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Address the Federal Gift Tax Rules

• Marital deduction

• Annual gift tax exclusion of present interests in property

• Lifetime gifting exemption

• Income tax basis rules

• Be Aware of the Code Section 2036(b) “Trap”

- The retention of voting rights in a controlled corporation

(defined as the right to vote at least 20 percent of the stock)

is considered a retained interest in the enjoyment of the

transferred property.

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If the Owner Dies Owning the Business, Address

Liquidity Issues

• Code Section 303 Redemptions to Pay Death Taxes

• Code Section 6166 Installment Payments

Planning Consideration:

• Be wary of an unintended dilution of the family business interest.

If the family owns 100% of a business interest, this will not be a

problem. However, if two families, for example, each own 50%

of the stock of the business, any redemption of voting stock from

one family will create a loss of control situation for the

redeeming family.

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Consider advanced estate planning techniques to freeze the

value of the business and/or transfer it to the next generation

• Self-Canceling Installment Note (SCIN)

• Private Annuity

• Grantor Retained Interest Trusts (GRATs)

• Installment Sales to Intentionally Defective Grantor Trusts (IDGTs)

• The Charitable Bail-Out: Transfer the Family Business Interest and Receive a

Tax Deduction

• Family Partnerships and LLCs as Family Transfer Vehicles

• Multi - Generation-Skipping Transfer Tax Planning: Using Dynasty Trusts

Issue: ATRA made the estate tax exemption $5 million per

person, indexed for inflation since 2010 – with a 40% tax rate

on the excess value in a person’s estate. The portability of the

deceased spouse’s unused exemption amount has been made

permanent.

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Enter Into a Buy-Sell Agreement

Considerations for Buyers and Sellers in Buy-Sell

Agreements for Closely-Held Businesses

• Objectives of a Buy-Sell Agreement

• For the Deceased Owner’s Estate

• For the Retired or Disabled Owner

• For the Remaining Owners

Types of Buy-Sell Agreements

• Cross-purchase

• Entity buy-out

• Hybrid agreement

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Enter Into a Buy-Sell Agreement

Choosing the Right Type of Agreement

• Number of Owners

• Premium Payments on Life Insurance Policies

• Transfer for Value Problems

• Alternative Minimum Tax Problems

• Accumulated Earnings Tax

• Basis for Income Tax Purposes

Suggested Terms of a Buy-Sell Agreement

• Triggering Events

• Setting the Purchase Price

• Payment Terms

• Should the Buy-Sell Be Mandatory or Optional?

• Restrictions

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Sell the Business to Third Parties

Form of the Transaction

• As a general rule, sellers prefer to sell stock, while buyers prefer

to acquire assets.

Tax Classifications of Business Acquisitions

• Taxable asset acquisitions

• Taxable stock acquisitions

Taxable Asset Acquisitions: Allocation of the

Purchase Price Among the Acquired Assets

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Sell the Business to Third Parties

Code Section 1060: Specific Rules for Allocation of

the Purchase Price - Taxable Asset Acquisitions

• “Residual” method of allocation: purchase price is allocated in

accordance with a specified system of priorities, first to

identifiable tangible and intangible assets acquired, up to the

amount of the fair market value of such assets. Any remaining

consideration (the residual amount) is then allocated to goodwill.

• Residual method’s system of priorities creates seven categories

of asset classes

Rules of Code Section 1060 still leave a great deal of

room for disputing purchase price allocations with

the Internal Revenue Service

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Special Considerations Involving S

Corporation Acquisitions

Eligibility Issues

• 100 shareholder limit

• Limitations on permitted shareholders

• Single class of stock

Debt vs. Equity Issues

• When debt is involved in an acquisition involving an S

corporation, concern must be raised that the debt will not be

reclassified as an equity interest and lead to a violation of the

single class of stock requirement.

Built-In Gains Tax Issues

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Special Considerations Involving

Acquisitions of Partnership Interests

General rules: capital gain and ordinary income

• As a general rule, the sale of a partnership interest (or an

interest in a limited liability company, since it is taxed as a

partnership) represents the sale of a capital asset.

• Capital asset treatment will not apply to the extent the sale

proceeds are attributable to “Section 751 assets” of the

partnership.

- Inventory

- Unrealized receivables

• When a partnership interest is sold, the selling price is allocated

among the partnership assets as divided into Section 751 assets

and non-Section 751 assets based upon the relative fair market

values of each category

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Special Considerations Involving

Acquisitions of Partnership Interests

General rules: Basis of Acquiring Partner’s Interest • The purchaser of a partnership interest acquires a cost basis in that

interest. This is sometimes called a partner’s “outside basis.”

• The purchaser’s basis in the assets of the partnership itself is not equal

to the cost of the partnership interest. The acquiring partner’s share of

this basis (sometimes called the “inside basis”) is not affected by the

acquisition of a partnership interest.

• This failure to receive a basis adjustment can be remedied by having

the partnership make a Section 754 election. The effect of this election

will be to have a basis adjustment in the partnership property apply with

respect to (only) the incoming partner.

• When the Section 754 election is made, the basis of the overall

partnership assets does not change.

• The basis adjustment is allocated proportionately between the

categories of assets to reduce the difference between FMV and basis.

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Questions?

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PFP Section Resources (aicpa.org/PFP) The CPA’s Guide to Financial & Estate Planning– Volumes 1-4

Planning After ATRA and the Net Investment Income Tax Toolkit:

aicpa.org/pfp/proactiveplanning

More resources on estate, tax, retirement, insurance, and investments

(aicpa.org/pfp)

Forefield Advisor (aicpa.org/pfp/forefield) • Client education and communication tool

• Written by CPAs, attorneys and other subject matter experts.

• More than 3,000 resources covering personal financial planning, including estate, tax, retirement, investment

and risk management planning.

• Keyword search: American Taxpayer Relief Act

AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/PFP) –

January 20-22, 2014 in Las Vegas

• 2-day session (Jan 18-19) for those in earlier stages of PFP

o Implementing PFP Services: Step by Step Plans for Success

For the full calendar of upcoming PFP Section events, visit www.aicpa.org/PFP

and click on CPE & Events.

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http://www.aicpa.org/pfp/proactiveplanning




http://www.aicpa.org/pfp

http://www.aicpa.org/pfp

http://www.aicpa.org/pfp/forefield




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Upcoming PFP Section Web seminars Register now for these events:

• More from this series:

- Essential Estate Planning Considerations*

- Portability – A Planning Game-Changer – But Not as Simple as It

Appears*

- Business Succession Planning After the American Tax Relief Act of

2012*

- Taxation of Divorce (November 21, 1:00-2:45p.m. ET)

• Top Estate and Income Tax Planning Strategies (November 11, 1:00-2:45p.m.

ET)

• Investment Tax Planning – Creating Tax Alpha (November 12, 1:00-2:45p.m.

ET)

• PFP Power Hour: How to Use Forefield Advisor in Your PFP Practice (November

14, 3:00-4:00p.m. ET)

• Trust Situs for Dynasty Trusts & DAPTs (November 15, 1:00-2:45p.m. ET)

For the full calendar of upcoming PFP Section events, visit aicpa.org/PFP and

click on CPE & Events.

*To access the archives, visit aicpa.org/pfp/webseminars.

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http://www.aicpa.org/PFP

http://www.aicpa.org/pfp/webseminars


CPA/PFS News and Events

PFS Referral Program

• Receive 100% credit to apply toward future CPA/PFS dues by

referring a CPA to become a PFS or sit for the PFS exam

PFS Exam

• Registration open for winter window

• Discounts, sponsorships and volume pricing available

Education Opportunities

• Live 2 ½ day review class – 3 locations in Oct/Nov: OH, AZ, GA

• In-depth courses in estate, retirement, tax, investments,

insurance, and PFP process

• Self-study PFS exam review course

Learn more at aicpa.org/pfp/pfs

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http://www.aicpa.org/pfp/pfs




Documents

Planning After ATRA: The CPA’s Guide to - aicpa.org After ATRA: The CPA’s Guide to Financial and Estate Planning Business Succession Planning Presented by: Steven G. Siegel, JD,