Resnick Associates - Master Builders of Iowa

MASTER BUILDERS OF IOWA 

100 TH Annual 

Construction Industry Convention & Expo 

Iowa Events Center - Des Moines, IA 

February 21, 2012 

Resnick Associates

Company Succession Planning: 

Guarding Business and Non- 

Business Assets from the 

Ravages of the IRS 


Resnick Associates 

1. Second Generation Estate Planning, Business 

Succession and Life Insurance Planning Firm 

2. Clientele throughout the United States 

3. Speakers and advisors to the construction 

industry, MBI, and business owners throughout 

the country. 

4. Written articles nationally and regionally 

5. Featured in book Streetwise Marketing Plan 


Important Questions to Ask Yourself 

1. Are you working the majority of your lifetime to build 

your business only to eventually lost it 

2. Are you putting your family in the eventual position 

of no longer being on speaking terms 

3. Will your business and family maintain a healthy 

cash flow when you are gone 

4. Do you trust politicians 


Why Do Businesses Fail 

• Mismanagement 

• Poor Investments 

• Inefficient Succession/Estate Planning 

WHICH IS THE LEADING 

CAUSE 


The Answer Is…… 

INEFFICIENT 

SUCCESSION/ESTATE PLANNING! 


23.3 Million U.S. Businesses 

10% Public/90% Private 


2 OUT OF EVERY 3 FAMILY BUSINESSES 

DO NOT MAKE IT FROM THE FOUNDER TO 

THE 2 ND GENERATION! 

• Original Owner Can’t “Let Go” 

• Lack of Plan or Inadequate Planning 

• The Next Generation is Ill Prepared 


IMPORTANCE OF 

SEPARATING COMPANY 

FROM FAMILY 

• Challenge for Parents: COMMUNICATION 

• Family Meetings 


10 POINT 

BUSINESS SUCCESSION 

PLANNING CHECKLIST 

Have These Issues Been 

Addressed 


Issue #1 

Define Personal Goals and Vision for the 

Transfer of Ownership and Management 


Issue #2 

Identify Your Successor 

If you are a Family Business, is a Family 

Member the best choice to take over 

Typically the answer is “Yes”, but it should not 

be automatic – the business must be run as a 

business first! 


Issue #3 

The Importance / Unimportance of 

Family Involvement in Leadership and 

Ownership of the Company going 

Forward 


Issue #4 

Techniques to Reduce or 

Eliminate Estate Taxes 


Issue #5 

Liquidity Positioning to Avoid the Forced 

Sale of the Company and Provide for 

Estate Equalization 


Issue #6 

Buy-Sell Agreements 

A. Stock Redemption 

B. Cross Purchase 

C. Wait and See 


Issue #7 

Contingency Plan in the Event of 

Disability 


Issue #8 

Stock-Transfer Techniques to Help 

Achieve Succession Goals 


Issue #9 

Dependency on Business to Meet 

Retirement Cash Flow Needs 


Issue #10 

Business Valuation 

Is Succession to Family Members 

or Outsiders 


Some Leading Causes for 

Unsuccessful Succession 

• No Succession Plan in Place 

• Ineffective/Outdated Plan 

• Unable to Retain Key Execs/Personnel after 

owner exits the business 

• Insufficient Personal Estate Plan – 

Company left to Inactive Spouse and/or 

family members 


New Tax Law 

Tax Relief, Unemployment 

Insurance Reauthorization, 

and Job Creation Act of 2010 


An Inside Look 

• Exemption Amount Increased to 

$5m/individual (during life, death or 

combination) 

• Portability 

• Tax Rate 35% 

• Favorable Tax Treatment Sunsets in 

2 years 


December 6, 2010 

The Wall Street Journal 

• President Obama said that even he does not 

like “the extension of the tax cuts for the 

wealthiest Americans and the wealthiest 

estates.” He said, “Republicans have asked 

for more generous treatment of the estate 

tax than I think is wise or warranted.” But 

he finds consolation in the fact that the 

“generous treatment” is “temporary.” 


November 17, 2011 

• United for a Fair Economy and Responsible 

Wealth applaud the introduction of the 

Sensible Estate Tax Act of 2011 by 

Congressman Jim McDermott, a senior 

member of the House Ways and Means 

Committee. 

• The Sensible Estate Tax Act of 2011 brings 

the estate tax rates back to pre-Bush era 

levels, with a maximum marginal rate of 55% 

and a $1 million exemption, both indexed to 

inflation beginning in 2000.

FACT 

FAMILY HELD AND PRIVATELY 

OWNED BUSINESSES REMAIN 

IN A VULNERABLE POSITION 


What does this mean for 

today’s attendees 

• By not addressing today’s issues with 

proper estate, business and insurance 

planning, you will be making inevitable 

costly mistakes! 

• Utilize the same focus in preserving and 

transitioning your assets as you do in 

building your assets 


Acquiring Assets 

Planning For Estate 


Common Goals 

• Certainty of Distributions 

• Reduce or Eliminate Estate Taxes 

• Ensure all Children are Treated Fairly 

• Provide for Care of Minors & Disabled 

• Preserve Family Business for the Family 


Common Mistakes 

• Unrecognized Estate Size and Tax Hit 

• Poor Liquidity Position 

• Improperly Arranged Life Insurance 

• Lack of a Master Game Plan 


Types of Trusts 

• Revocable - Grantor CAN change or 

terminate the Trust 

• Irrevocable – Grantor CANNOT change or 

terminate the Trust 


Revocable or Irrevocable Trust 

Depends on the Planning Purpose 


Estate Analysis 

• Assets – Both business and non business 

• Assets to go to whom you want, when you 

want, and how you want 

• Current Plan – Are you 100% certain this 

will happen 


Ownership 

How You Own What You Own 

Decides How You Pass What You Pass 


Property in Your Gross Estate 

Cash 

Real Estate 

Personal Property 

Retirement Plans 

Business Interests 

Investments 

Tangible Assets 

Revocable Trusts 

Annuities 

Life Insurance 


Annual Exclusion 

• Gifts of up to $13,000/year 

• Present Interest 

• No Tax, No Paperwork 

• Joint Gift; $26,000/year 


Consistent Lifetime Transfers 

Significant estate tax savings can ultimately 

be realized with combination of annual 

gifting PLUS utilizing the $5m lifetime gift 

exemption amount 


Unlimited Marital Deduction 

• Dollar for Dollar Deduction on Assets 

Transferred to a Spouse 

• Outright, Unconditional Transfer or 

• Qualifying Trust (GPA or Q-Tip) 

… included in Spouse’s estate at death 


With No Estate Plan 

• State Law Determines Who Receives Your 

Assets 

• State Law Fixes the Timing and Terms. 

Children may have unrestricted control of 

large sums of money 

• The court appoints administrators whose 

ideas may differ from yours 


With No Estate Plan (Con’t) 

• Unnecessary Taxes and required 

administrative expenses will increase costs 

• The Court appoints a Guardian for your 

Children 

• Unplanned Forced Business Sale Will 

Cause Problems 


Advanced Planning 

• Grantor Retained Annuity Trust 

• Intentionally Defective Grantor Trust 

• Private Annuity Sales 

• Self Cancelling Installment Notes 


SURVEY

Liquidity Needs In Estate 

Planning 

• Administration Expenses 2-5% of 

Gross Estate 

• State Death Taxes 

• Federal Estate Taxes (within 9 months) 

…often Deferred to Second Death 

• Family Income Needs 


Sources of Liquidity 

Cash 


C.D.’s 

Stocks 

Bonds 

Annuities 

Residence(s) 

Corporation/LLC 

Real Estate 

Liquid 

Semi Liquid 

Illiquid 


METHOD TO PAY 

Cash 

• Reduces Total Bequest to Family 

• Reduces Funds Family May Need 

for Current and Future Expenses 

• Future Earnings on Funds Gone Forever 

• Capital to run Company is Gone 


METHOD TO PAY 

Sale of Illiquid Assets 

• Reduces Total Bequest to Family 

• Complete Loss of Future Income 

• Unlikely to Receive Fair Value 


Result 

Valuable Asset is Gone 

• Income Lost to Family Forever 

• Stranger/Competitor Receives Future 

Income and Appreciation 

• Family Receives Neither the Family 

Business/Property Nor Its Value 

• IRS Receives the Cash 


METHOD TO PAY 


• Assuming adequate insurability, by far, the 

least expensive method to pay estate taxes 

• Death Benefit May Be Estate Tax Free if 

Ownership is structured correctly 

• Preserves Assets - including the Business 

• Maintains Family Harmony 


Irrevocable Trust with 


• Preserves entire estate 

• Preserves business/real estate for family 

• Pay Taxes and Administration costs in the 

most cost efficient manner 

• Maintain Family Harmony 


Confusion - What Type 

• Term 

• Universal 

• Variable 

• Variable Universal 

• No Lapse Universal 

• Whole Life 

• Whole Life / Term Blend 

• Individual of Second to Die 


CAUTION 

• Variable - Warning 

• Universal - Warning 

• Variable Universal – Warning 

• No Lapse Universal - Potential Warning 


Life Insurance is an ASSET 

• The second largest ASSET for most 

business owners is the face value of their 

life insurance 

• Most business owners do not have a 

thorough understanding of how their 

insurance contracts function - this often 

leads to significant problems for their 

Estate and Succession Plans 


The Objective of An 

Insurance Premium Payment 

TRANSFER A RISK - BUT IS THIS 

GUARANTEED TO HAPPEN 

IT DEPENDS….. 


Variable Life Insurance 

The following items are NOT guaranteed 

1. Premium 

2. Cash Value 

3. Death Benefit 


Universal Life Insurance 


1. Premium 

2. Cash Value 



Variable Universal Life 

Insurance 


1. Premium 

2. Cash Value 



Company Safety is Critical 

• Verify Ratings by all 5 Major Independent 

Rating Services 

• Comdex Score 

• Any recent downgrades of company 


Questions that need 

Correct Answers 

• Was your life insurance acquisition based 

upon strict due diligence 

• Do you know the Comdex Score of your 

insurance company(s)....have you ever 

heard of a Comdex Score 

• Are you certain, with all the changes in the 

market place, that you have policies with 

the lowest net cost 


“I thought Life Insurance was 

Tax Free” 

• Income and Estate Tax Situations 

• Ownership of Policy must be set up correctly 

• Pension Protection Act of 2006!! 

• Three Party Contracts 


“Hidden” Value in Existing 

Insurance Portfolio 

• Unneeded Life Insurance may prove to be a 

financial windfall 

• Certain policies (depending on age, health, 

and policy status) are very attractive to 

outside buyers 

• Payout received, may be significantly 

higher than cashing in the policy 


Valuation 

Important for Lifetime Gifts 

and Testamentary Transfers 

Fair Market Value 

What a Willing Buyer Would 

Pay a Willing Seller, Neither Being 

under a Compulsion to Buy or Sell 

and Both Knowing All Relevant Factors 


Valuation 

IRS Revenue Rulings 

Key Ruling - 59-60 

Earnings 

Capacity 

Book Value 

Dividend 

Capacity 

Marketability 

Risk Closely 

Held 

Market Factor 

Publicly Held 

Minority 

Discounts 

Control 

Premium 


Business or Surviving Shareholder 

Required Financial Obligation 

$ 5 MILLION BUYOUT AMOUNT 


What are the Choices to 

Fund a Buyout 

• Sinking Fund 

• Borrowing 

• Installment Method 

• Life Insurance

What are the Costs for each 

method 

• SINKING FUND - $5,000,000 

• BORROWING - More than $5,000,000 

• INSTALLMENTS - More than $5,000,000 

• LIFE INSURANCE - Significantly Less Than 

$5,000,000 


Advantages of a Formal 

Buy-Sell Agreement 

• Surviving Owner maintains Continuity of 

Ownership and Management 

• Decedent’s Estate / Family Converts 

Unmarketable, Non-Liquid Business 

Interest to Cash 

• Provide Fair and Reasonable Price 

• Possibly Peg the Value for Federal Estate 

Tax Purposes 


Types of Buy-Sell Agreements 

• Stock Redemption 

• Cross Purchase 

• Wait and See 


Key Components 

Buy-Sell Agreement 

• Language that addresses all contingencies 

• Valuation 

• Funding 


Stock Redemption Plan 

• “A” and “B” Form Corporation & Each 

Contributes $500,000 

• 10 Years Later Corporation is Worth $10,000,000 

• “A” and “B” Enter Into a Stock Redemption 

Agreement 

• Corporation Becomes Owner and Beneficiary of 

$5,000,000 Policy on Both “A” and “B” 



“A” Dies: 

• $5,000,000 Death Benefit is Paid to the 

Corporation 

• Corporation pays $5,000,000 to “A”s Estate 

• “A”s Estate Redeems Stock Back to 

Corporation 

• “B”s Stock is Now Worth $10,000,000 

(Same # Shares, Twice the Value) 



• “B” Decides to Retire and Sell Corporation 

for $10,000,000 

• “B” Must Pay Capital Gains taxes on 

$9,500,000 ($10,000,000 Minus Original 

Cost Basis of $500,000) 


Cross Purchase Plan 

• “A” and “B” Form Corporation & Each 

Contributes $500,000 

• 10 Years Later Corporation is Worth 

$10,000,000 

• “A” and “B” Enter Into Cross Purchase Plan 



• “A” is Owner and Beneficiary of 

$5,000,000 Policy on “B” 

• “B” is Owner and Beneficiary of 

$5,000,000 Policy on “A” 



“A” Dies: 

• “B” is Paid $5,000,000 from Policy on “A”s 

Life 

• “B” Pays “A”s Estate $5,000,000 for “A”s 

Stock 

• “B” now Owns $10,000,000 of Company Stock 



• “B” Decides to Retire and Sell Corporation 

for $10,000,000 

• Since “B” bought “A”s Stock for 

$5,000,000 and had $500,000 Original 

Basis… 

• …”B” Pays Capital Gains Taxes on 

$4,500,000 

• RESULT…. Tax Savings on $5,000,000 


Summary…… 

• Buy/Sell Agreements are more than a 

Business Planning Strategy 

• If drafted and funded properly, they protect 

everyone – owners and their families and 

employees and their families 

• Be cognizant of design to avoid possible 

unnecessary taxes in the future 


SPECIAL CASE STUDY 

ABC CONSTRUCTION, INC. 

SUCCESSION PLAN 


Case Facts 

• Louie, Age 63 and Louise Young, Age 61 

(Parents – Both Active) 

• Three Children: 

Joe, Age 31 and Unmarried 

Moe, Age 28 and Married to Nora 

Helena, Age 25 and Married to Ken 

• Louie, Louise, Joe, Moe each own 25% 

• Fair Market Value of ABC, Inc. is $7,000,000 

• Louie and Louise Estate Valued at $10,000,000 


Current Plan 

• Louie and Louise have Simple Wills 

• At Second Death, Estate is Distributed 

Equally among the Three Children 

• There is no Buy-Sell Agreement 

• Moe and Helena have Simple Wills 

• Joe does not have a Will 


Goals 

• Distribute the Estate Fairly Upon the Last to 

Die of Louie and Louise 

• Assure that ABC, Inc. is Run by the Two 

Sons Who are Active in the Business 


Possible Results of Current 

Plan after Death 

Joe 

42 Shares 

$500,000 

Moe 

42 Shares 

$500,000 

Louie 

25 Shares 

Louise 

25 Shares 


Helena 

16 Shares 

$500,000


Plan 

At Moe’s Subsequent Death 

Joe 

42 Shares 

Moe 

Nora 

42 Shares 

Helena 

16 Shares 



Plan at Moe’s Subsequent 

Death 

• Nora and Helena May Sell ABC, Inc. to 

Strangers/Competitors 

• Joe May Lose Control of ABC, Inc. 

• Who is Running ABC, Inc. 


Solutions/Step-One 

Cross Purchase Agreement 

Assets Transfer 

to Survivor at 

first death 

Louie 

Louise 

Brothers 

Purchase 

Shares at 

Second Death 

Joe 


Moe 

Cross 

Purchase

Solution/Step Two 

Contingent Beneficiary 

• After Sons Buy Shares, Estate Has 

$7,000,000 in Newly Created Liquid Assets 

• Parents now Have the Ability to Increase 

Cash Distribution to Helena 


Possible Results/New Plan 

Cross Purchase Agreement 

Louie 

Louise 

Purchased 

Shares at 

Second Death 

Cross 

Purchase 

Joe 


Moe

Possible Solution 

Totals 

Joe 

$2,250,000 

50 Shares 

Moe 

$2,250,000 

50 Shares 

Helena 


$4,000,000

CONTACT INFORMATION 

Leon B. Resnick 


14640 Grant Street 

Overland Park, KS 66221 

(913) 681-5454 office / (816) 550-6268 cell 

Terrance K. Resnick 


2073 Doral Drive 

Harrisburg, PA 17112 

(717) 652-2929 office / (717) 991-3911 cell 


Today and Tomorrow 

• Complete and turn in questionnaire for 

individualized additional information 

• 30 Minute Complimentary Consultations 

tonight and tomorrow (Sign-in Sheet) 

• 30 Minute Complimentary Phone 

Consultations for anyone unable to meet in 

person 


Company Succession Planning 

“Guarding Business and Non-Business Assets 

from the Ravages of the IRS” 

Master Builders of Iowa 

Des Moines, Iowa 

February 21, 2012 

Name ______________________________________________ 

Company Name __________________________________________ 

Business Address ______________________________ 

Phone Number ____________ 

City/State ___________________________________________ 

Family Business Yes _____ No _____ 

Owner Yes _____ No _____ 

I Would Like to Discuss Information On The Following: 

___ Transferring Family Business To Next Generation 

___ Estate Equalization for Active and Non-Active Children 

___ Reducing Federal Estate Taxes 

___ Review of Current Buy-Sell Agreement or Creating New Buy-Sell Agreement 

___ Retention of Key Executives/Employees in Company 

___ Review of Personal/Business Life Insurance 

___ How to Profit from Existing Life Insurance Policies that are no Longer Needed 

___ Controlling Employee Benefits Expenditures 

Other Associations or Buying Groups that could benefit from this 

seminar: 

CONTACT INFORMATION 

Leon Resnick 

Terrance Resnick 



14640 Grant Street 2073 Doral Drive 

Overland Park, KS 66221 Harrisburg, PA 17112 

(913) 681-5454 (717) 652-2929 

ResnickAssocLBR@aol.com 

ResnickAssocTKR@aol.com

Resnick Associates - Master Builders of Iowa

Create successful ePaper yourself

Delete template?

Save as template?