Business Interests & Qualified Plans

People generally have estates to plan because they have worked their entire lives to accumulate assets and property. They may have been entrepreneurial and run their own family business, or they may have worked for years for one company, amassing large thrift plans, IRAs, or other qualified plan benefits. Many small business owners are taking advantage of the very powerful SIMPLE IRAs (Savings Incentive Match Plan for Employees) as well as the so-called Roth-IRA. Unfortunately, taxes can take substantial chunks of these assets before they can be passed to younger generations.

Employee benefits--which include IRAs, thrift plans, 401(k) plans, SEPs, and Keoghs-present particularly challenging issues in estate planning. Excise taxes loom in the background to penalize improper withdrawals: too much, too little, too late, too soon. Beneficiary designations must include flexibility to preserve income tax elections for survivors. When dealing with employee benefits, the employee must weigh the benefits of planning for retirement versus planning for estate taxes versus planning for income taxes. All too often, improperly planned estates with substantial employee benefit funds lose up to 70% or even 85% of the value of the fund due to taxes.

Family Business Owners - must consider issues of management succession, ownership succession, and business valuation. A very important document for these entrepreneurs is a buy-sell agreement, which fairly governs all co-owners and employees, and helps in estate valuation with the IRS. Every closely-held business should also have a management succession plan in place to take care of unforeseen circumstances, such as the disability or death of a principal owner or manager. Many family business owners want to pass their business down to younger family members, and must be aware of estate freeze techniques, complicated requirements under Chapter 14 of the Internal Revenue Code, and use of valuation discounts. Some of these techniques involve gifting of the fast appreciating family business interests.

Special estate tax breaks exist for taxpayers whose business interests comprise a substantial portion of their estates. Section 303 of the Internal Revenue Code allows a corporation to buy back stock from an estate or trust without the risk of the distribution being treated as a dividend for income tax purposes, so long as the distribution is to cover estate taxes, funeral, and administrative expenses. Section 6166 of the Code allows certain estates to qualify for a deferral of estate tax payments, which are normally due in full nine months after the death of the taxpayer. Under 6166, no payment other than 4% interest is due during the first five years, and then the tax is paid over the course of ten equal annual installments, allowing deferral, for as long as fourteen years. Under the Taxpayer Relief Act of 1997, the interest may be as low as 2% for qualifying closely held businesses.