Estate Planning Mistakes - Number Twenty-Two

If you have a business, then you should have a buy-sell agreement or a business succession plan. Business succession planning, including ownership succession and management succession, is critical to business owners. Will the business be transferred to family members, a key employee or other purchaser?

The buy-sell agreement is often an integral part of such planning. There are three basic types of buy-sell agreements: First, stock redemption agreements where the company agrees to purchase the departing owner’s interest; second, cross purchase agreements where the other owners agree to purchase the departing owner’s interest themselves; third, hybrid agreements that combine elements of the other two.

A buy-sell agreement protects each owner’s interest, preserves value, and prevents later disputes when an event of transfer occurs. A transition event could be a voluntary departure, disability, retirement or death. What happens if one of the owners gets a divorce? Without a buy-sell agreement to address these issues and assure orderly transition, the resulting chaos could be financially devastating for any business owner.

Critical Note:
How do you value your business? Once a value is established, how do you fund a buy-sell agreement? Business valuation is one of the most problematic issues surrounding the buy-sell agreement. There are several business valuation methods. A few of the common methods include determining value with reference to (1) book value, (2) capitalizing the earning of the company over a fixed period of time, (3) setting the value by independent appraisal, or (4) periodically setting a fixed value by mutual agreement of the owners of the company. Experience shows that having the owners periodically determine the value is seldom satisfactory; they seldom get around to doing it and the value gets stale. A backup, such as determining the value by appraisal if the owners haven’t set the value in the last year or two is an important provision of a buy-sell agreement. Choosing the appropriate valuation method to implement is critical.

As pertains to funding, there are generally three ways to fund a buy-sell agreement. They are a cash sale which requires savings; a financed sale whereby part of the sales price is represented by a promissory note usually secured by a pledge of the stock being transferred; or if a cash or financed sale is not feasible, a sale funded by life insurance may best address the funding of a buy-sell agreement.

Contact us at http://www.ythlaw.com/for all your business succession needs.

Seven Principle of Wealth - Number Six

Six, estate planning is very important when you think about generational wealth. Estate planning is not only about providing for your family when you die but it also includes retirement planning. You want to have assets/money available to you when you are no longer working. When you begin the estate planning process, you cover all of your financial arrangements for the present, future and beyond.

Actions Recommended: Again as mentioned in other principles, you want to begin saving at your job and taking full advantage of any matched savings program. Retirement assets should not be placed in risky ventures as you age and even when you are younger your risks should be well calculated.

Should my children inherit my Retirement Plan?

Question:
I would like my children to inherit my qualified retirement plan. However, I want to control the distribution of those assets after I die. How can I accomplish this goal?

Answer:
You should have a trust name as the “designated beneficiary”of a qualified retirement account.

You, like many other people, may have significant assets in a retirement account and you want to be assured that after your death such assets benefit the ones they love. For example, if your surviving spouse were to remarry, the new spouse could get the money if you fail to plan ahead. If, as another example, you were in a second marriage, protecting your children from a prior marriage may be your concern. Another possibility is that you want to leave all the retirement assets to minors or individuals whom you do not trust to make good financial decisions. The terms of a designated beneficiary trust could address all of these situations.

In order for a trust beneficiary to qualify as a designated beneficiary, the trust:
must be valid under state law,
must be irrevocable or, by its terms, become irrevocable at the death of the grantor and
must have identifiable individuals as beneficiaries.
A copy of the trust must be provided to the retirement plan administrator
As long as these requirements are met, the life expectancy of the trust's oldest beneficiary will be used to determine the applicable distribution period.

Critical Note:
By selecting a trust as beneficiary, a surviving spouse would lose the opportunity to roll the retirement account over into a new qualified retirement account. This rollover is a big advantage for a spouse because the spouse can select new beneficiaries and a new distribution pattern. Your situation would have to be assessed to make sure giving up this spouse-only privilege is in your best interest.

Contact our office with your questions today.