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BUSINESS SUCCESSION PLANNINGA Business Owner’s Introduction

2 ] B U S I N E S S S U C C E S S I O N P L A N N I N G | A BUSINESS OWNER’S INTRODUCTION

TABL

E OF C

ONTE

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A S S E S S I N G T H E S I T U A T I O N . . . . . . . . . . . 3

U N E X P E C T E D S U C C E S S I O N P L A N N I N G . . . 3

V O L U N T A R I L Y E X I T I N G A B U S I N E S S . . . . 4 - 5Selling the Business Outright

Winding Up the Business

Gifting/Inheritance

x Retirement Spending Needs

x Business Management

x Control

x Taxes

Selling to an “Interested” Party . . . . . . . . . . . . . . . . 5 - 6x Outright Sale

x Sale to an Employee Stock Ownership Plan (ESOP)

Special Valuation Opportunities . . . . . . . . . . . . . . . 7 - 8x Minority Interest

x Lack of Marketability

x Lack of Control

Estate “Freeze” Techniques . . . . . . . . . . . . . . . . . . 8 - 10x GRATs

x Utilizing an Intentionally Defective Trust

B R I N G I N G I T A L L T O G E T H E R . . . . . . . . . . . . 11

Important Disclosures . . . . . . . . . . . . . . . . . . . . . . 12

If you ask any business succession expert, or any

business owner that’s gone through it, the best

advice a business owner may get is to plan for

exiting a business at the same time you start one. In

the real world, that doesn’t happen too often. Many

business owners start their business on a wing and

a prayer just hoping to make it. Thinking about how

to exit a successful business, while always the goal, is

rarely the priority in the beginning.

Whether you’re contemplating starting or buying a

business, or if you’re a current business owner, you

should consider reviewing and/or implementing your

business succession plan. There are several issues to

address and techniques to consider depending on

your goals.

For purposes here, business succession is defined as

the voluntary or involuntary exit from a closely held

business. While an outright sale of the business to a

third party is always a viable exit strategy, the focus

here will be transfers to family or key employees.

A S S E S S T H E S I T U A T I O NThe first step in creating or reviewing a business succession plan

is to assess the situation . What planning techniques have been

implemented? Is there a buy/sell agreement with the business

partners? How is it funded? Does the incorporating document for the

business have provisions in it regarding business succession? Many

incorporating documents have either specific or boilerplate language

regarding these issues that may or may not align with the business

owner’s goals .

The next step is to identify the business owner’s goal for both near term

and long term concerns . Is there a plan in place if something happens

to the business owner unexpectedly? Does the business owner want

to give the business away? Does the business owner want to sell the

business to family members, the next generation, key employees, or

to a group of employees (such as an Employee Stock Ownership Plan

to be discussed below)? Is it a mix of these options? Establishing what

the ideal outcome may be for the business owner helps guide what

succession planning techniques may be applicable . Of course, there

will be trade-offs to consider as the plan is implemented .

Another part of the assessment is whether there are other co-

owners or key partners/employees that must be consulted when

establishing business succession goals . If there are business partners,

how does someone’s exit affect the business? Are there documented

agreements in place to address these concerns? Are each business

owners’ goals aligned with their co-owners? If family is considered

part of the succession plan, will the other owners and key employees

be willing to work with the family?

There are many moving parts to a succession plan . Once the current

situation is understood, and goals have been established, there are

two primary exit events to address; the unexpected succession plan

and the planned exit .

U N E X P E C T E D S U C C E S S I O N P L A N N I N GUnexpected succession planning can come in the form of the

business owner or key personnel in the business quitting, dying,

becoming incapacitated, etc . Regardless of the cause, losing such a

person unexpectedly could devastate the value or operating systems

of the business . In the case of a death, the deceased owner’s family

may be without their primary source of income, could be thrust into

owning/managing a business unfamiliar to them, or could be left

with a hefty estate tax liability without enough liquid assets available

to pay the tax .


With proper planning, though, business owners can address their

specific concerns . Just a few of the several common techniques

available to prepare for unexpected succession planning needs are:

• Buy/Sell Agreements: Buy/Sell agreements are common among

multiple owner businesses . In their simplest form, a buy/sell

agreement is a contractual obligation for the owner that exits the

business (or the owner’s estate) to sell their ownership either to the

other owners (often called a “cross sell” agreement) or back to the

business (often called a “redemption” agreement) . The sales price

is usually an agreed upon formula designed to represent the fair

market value of the exiting owner’s share . Many times life insurance

is used to “fund” buy/sell agreements as they are usually used for

protection should the business owner die unexpectedly .

• Key Person Planning: Sometimes the unexpected loss of a non-

owner key employee can be as devastating as the unexpected

loss of a business owner . Many businesses have key employees in

management, relationship or operational roles that simply cannot

be readily replaced if the employee left unexpectedly . Those

unexpected departures can be for a new job, due to incapacity

or even death . Because this type of planning is often done in

contemplation of incapacity or an unexpected death, insurance,

known as “key person insurance,” is often utilized .

A vesting key person insurance policy allows the proceeds to bridge

the gap from the loss of the key person until a solution can be found .

Funds become available to recruit and/or train a suitable replacement .

If a cash value life insurance policy is utilized but eventually not

needed, the policy could become an informal funding vehicle for a

non-qualified deferred compensation plan for the key individual .

Proper planning for the unexpected succession problem addresses

many issues . For business owners, their financial interest in the business

can be protected from an unexpected occurrence . For the business

owner’s family, liquidity concerns and asset preservation issues can be

addressed . For the business in general, and its employees, the ability

for the business to continue as a going concern can protect everyone’s

reliance upon the operating business and subsequent cash flows . In

short, proper planning for an unexpected event benefits everyone

related to the business .

• Sell the business outright to an outside party not already related to the business

• Wind up the business and terminate operations

• Give the business during life or as an inheritance to family or key employees

• A “sale” of the business to family, partners, employees, etc.

• A hybrid of any of these methods

V O L U N T A R I L Y E X I T I N G A B U S I N E S SAssuming things go well, the more exciting and fulfilling way to exit

a business is voluntarily . Some of the most common voluntary exit

techniques are:

Selling the Business Outright

A very common and sometimes very lucrative

succession plan involves selling the business to

an “outside” party . The buyer can be someone

looking to get into the business or a strategic

buyer wanting to take advantage of the

business’s particular area of expertise . At

Benjamin F . Edwards we may be able to help

a business owner find an outside buyer . Ask

your Financial Advisor about our investment

banking opportunities if you are interested . However, selling to an

outside person, while perfectly acceptable, is not the focus of this

document .

Winding Up the Business

Some businesses either can’t continue, or have no interest in

continuing, once the business owner is ready to end the business .

Simply wrapping up and “closing” a business is always an option, but

again, not the focus of this discussion .

Gifting/Inheritance

Many business owners simply would like to give their business over to

their family or to some key employees . These gifts may be something

contemplated while the business owner is still alive, or perhaps as an

inheritance technique . When contemplating these gifting techniques,

though, the business owner needs to consider several factors .


Retirement Spending Needs

If the business owner gifts away some or all of the business while

they are alive, the business owner also gives away the income stream

related to the gifted ownership . Before making gifts, the business

owner must be sure that they can comfortably meet their personal

retirement needs after completing such a gift .

Business Management

Often the business owner is also a key manager for business operations .

Will the business be able to efficiently carry on if the business owner is

no longer around? Can the succeeding management/business owner

maintain the business as an ongoing concern? Are there any personal

links with the exiting business owner such as key relationships with

customers, suppliers, bank lines of credit, etc .? The potential of all

of these factors to change after the business owner exits must be

considered .

Control

Is the exiting business owner giving up complete control of the

business, or just the equity in the business? It is possible in many

organizations that the ownership structure can be split so that there

are the “voting shares” of the business and the “equity shares” of the

business . Whether these types of split shares are possible will depend

on the type of business entity and other factors .

If an equity/control split is possible, however, such splits can solve

many issues . For example, if a business owner is ready to pass the

management reins, but needs to maintain an income stream from

the business to meet retirement spending goals, the business owner

can gift voting shares and retain equity shares . Thus, the new “owners”

will control the business but continue to pay the income stream for

the retiring owner for some time . The opposite is also possible if the

owner desires to gift equity but retain control of the ongoing business

decisions .

Of course there are risks to this plan . If the retiring business owner is

reliant upon the income stream, but the new management fails at

operating the business, the income stream could be lost . On the other

hand, new management may not wish to simply pack the coffers of

the retired partner while they operate the business . Making sure

all sides can live with the balancing act of these factors is key to a

successful transition .

Taxes

There are multiple tax considerations when making gifts of any type,

including business ownership . First, when one makes a gift during life

they also gift their tax basis to the recipient . Consequently, assuming

the original owner has a low cost basis, the new owners may be

constrained with future tax consequences if they later decided to sell

their interests .

Estate and Gift Tax - 2016 - 2018

Next, there are possible federal gift tax consequences to transferring

the business . Federal law currently allows individuals to gift during

life up to $15,000 per person per year ($30,000 if married) . Any gifts in

excess of this annual exclusion amount causes the gifting individual

to use their lifetime federal estate and gift tax exclusion amount,

which is $11 .18 million in 2018 . There may also be state specific estate

and gift tax consequences as well . The fact that the exclusion may

be used for giving is not prohibitive, but it is a factor for each specific

individual situation to consider .

If one waits to pass the business at death, there typically will be a step-

up in basis for the assets inside the business owner’s estate, including

the business . Estate taxes may be due if the estate is greater than the

applicable exclusion in the year of death, which could also include

state estate taxes . If the business is a large asset of the estate, getting

the taxes paid could cause issues . Generally estate taxes are due nine

months from the date of death . Business owners may want to look at

liquidity options such as life insurance or buy/sell agreements to help

with potential estate taxes .

Selling to an “Interested” Party

If gifting isn’t a goal, or if the exiting business owner needs to monetize

some or all of the business to meet retirement spending goals, selling

the business to family and/or key employees can be considered .

Regardless of the financial issues some owners may want to sell the

business to successors just so the successors have some “skin in the

game” with their new ownership . Whatever the motivation, there are

multiple considerations when selling to an interested party .

Year Annual Exclusion

Maximum Tax Rate

Estate & Gift Tax Exemption

2016 $14,000 40% $5,450,000

2017 $14,000 40% $5,490,000

2018 $15,000 40% $11,180,000

Outright Sale

Whether it is a portion of ownership

or the whole thing, a simple

technique would be for the existing

owner to sell their interests to the

interested party . For such a sale not

to be considered a gift for federal

gift tax purposes, the sale must be

for “fair and adequate consideration .”

This is where the balancing act

can begin . If the selling owner

discounts the price to a point that

the transaction doesn’t appear to be

for fair and adequate consideration

the IRS can deem the transaction

a gift for gift tax purposes and

cause potential gift tax liability on

the selling owner . While rarer, the

opposite can also be true if the

selling owner receives an excessive

premium for the sale of the business .

In that situation, the buyers could be

deemed to be making taxable gifts

to the seller .

Assuming the sale is for fair and

adequate consideration, and

assuming there are taxable gains on

the sale, there are some structuring

opportunities available . For example,

if the selling owner doesn’t want to

take the tax hit for the entire sale in

one year, an installment sale may

be appropriate . In an installment

sale the shares are sold over a

multi-year plan (one-third each

year for three years for example) .

The seller can then elect to pay any

Keeping it in the FamilyIf you own a family business

and you’re hoping to transfer that business to the

next generation, the odds are against you . According

to the Family Business Institute only 30% of

family businesses survive into the second generation,

only 12% are viable into the third generation,

and only about 3% of all family businesses operate into a fourth generation or beyond . The biggest

mistake with those businesses is the lack of a

viable and well thought out succession plan .

income tax consequences (typically

capital gain) in the year in which

they receive payment for the sale,

therefore spreading the tax liability

over three years in this example .

As discussed with gifting above,

and assuming the business can be

structured in such a way, the selling

owner can split the business into

voting shares and equity shares .

The owner can then sell only the

particular shares they wish . Such

techniques may help with ongoing

management and operational

transitions .

Sale to an Employee Stock

Ownership Plan (“ESOP”)

Outright sales may not be practical

or desired in some situations . If

an owner desires the company’s

employees own the business

utilizing an ESOP may be possible .

Generally speaking, an ESOP

is a qualified plan designed to

invest mostly in the stock of the

employer . In a sense, the ESOP is

really like a profit sharing plan for

the employees . ESOPs have certain

unique benefits, like the ability to

borrow money to purchase the

employer stock from shareholders .

As such, the ESOP allows the selling

owner to immediately exit the

business and the employees to buy

in over time .

6 ]


ESOPs are not a universal solution . There are some key factors one

must consider:

C or S Corp• The company must be a corporation (either C or

S corporation) with stock shares . Limited liability

companies, limited partnerships, etc ., do not

qualify as they do not have “stock” .

Company Size & Health• The company must be of an appropriate size

due to the cost and complexity of an ESOP

transaction . Usually companies valued in excess

of $5 million are candidates for ESOPs .

• The company needs to be healthy and have

reasonable prospects for continued earnings

and growth . In other words, the business must

have earnings and a value to justify the sales

price . An ESOP is a long term investment for

the employees and the company needs to have

long term value to justify the transaction .

Access to Cash• Because most ESOP plans involve the immediate

purchase by the plan of company stock from

the existing owners, the ESOP needs to have

access to cash . Often ESOPs borrow the funds

necessary to fund the initial transaction, which

means the company itself must be able to not

only secure the loan, but also have sufficient

earnings, profits and contributions to repay the

debt .

Participation• The exiting business owner must have a

desire for the employees to gain a significant

ownership in the business .

• While all employees do not have to participate

in an ESOP, to satisfy IRS nondiscriminatory

guidelines the ESOP must cover a substantial

percentage of “non-highly compensated”

employees . As such, most ESOPs cover all

eligible employees .

If the business is an appropriate ESOP candidate it can be an excellent

mechanism for a departing owner to sell shares to the company

employees . Employee ownership is known to raise company moral,

production and enthusiasm . Moreover, some ESOP structures may

provide tax management opportunities for the parties involved . The

details for an ESOP are company specific, and business owners should

consult with their tax and legal professionals, along with their financial

advisors, to determine whether an ESOP is an appropriate solution for

their business succession plan .

Special Valuation Opportunities

For either gifting or sales situations there may be special valuations

available to further the cause of the exiting business owner . This is

usually in the form of valuation discounts, though other techniques

may be available .

Recall that whenever the ownership interest is transferred, and

regardless of whether it is a gift or a sale, the fair market value of

the asset is what is transferred . Often times for both gifts and sales

to interested individuals, the selling owner would prefer a lower fair

market value determination so that the cost of the gift, or the amount

of consideration paid by an interested buyer, can be limited .

The IRS standard for valuing the transfer of any asset is the “willing

buyer/willing seller” test . In other words, what price would a willing

buyer pay for the asset and what price would a willing seller accept

to execute the transaction? That determination is used to establish

the value of a gift for gift tax purposes and/or to validate the value for

a sale . For publicly traded securities, the willing buyer/willing seller

test is valued by the stock exchanges . With a closely held business,

generally there is no “public” market so determining fair market value

can be difficult .

With this in mind there are several techniques utilized to try and

discount the value of a business for transfer purposes . Consider the

following example:

• Let’s assume a closely held business is valued at $1 .6 million for “book” purposes . Let’s also assume that the business owner wants to gift one percent of the business, or, for book purposes, $16,000 . Should the owner do this without any valuation discounts the owner would face a $1,000 taxable gift requiring the filing of a federal gift tax return ($15,000 annual exclusion accounting for the rest of the gift tax consequence) . Let’s also assume the business

owner wants to avoid the $1,000 taxable gift .


Minority Interest

One position to take is that a one percent interest in a closely held

business isn’t worth exactly one percent of the book value . The one

percent holder has a minority interest, consequently having very

little say in the business operations, and could therefore arguably

have difficulty trying to sell their one percent interest to a “willing

buyer” for $16,000 . The business owner could argue that the gift is

worth less than $16,000, perhaps $13,000, due to these limitations .

This technique allows the business owner to apply a minority interest

discount to the transfer .

Lack of Marketability

Under the same example, let’s assume the business has a provision in

its corporate records that requires any shareholder wanting to transfer

an interest in the business must first provide other shareholders a first

right of refusal to buy the shares . The one percent shareholder may

have difficulty finding a “willing buyer” to offer book value for a share

that will have to pass through the right of first refusal . Consequently,

the argument is that restraints on the marketability of the shares

mean a discounted value of less than $16,000 .

Lack of Control

Lack of control can also be offered as a discountable condition as well .

This can come from the mere fact that a one percent owner has no

control in a business when someone else owns ninety-nine percent

of the business . This can also come if the share that is gifted is a non-

voting share compared to the original owner retaining all or a majority

of voting shares . Again, the “willing buyer” test may justify a discount

in the value of the asset transferred due to a lack of control .

These are simplified examples of some common discounting

techniques . Business owners often employ more than one of the

discounting techniques to seek a sizable discounted valuation .

Properly structured, one could argue a discount for minority interest,

lack of marketability and lack of control for our example .

Of course the IRS typically takes an opposing position . Thus, many

discounting situations involve valuation experts employed by both

sides to justify their valuation . That said, there are many cases where

owners have successfully obtained 10%, 30% or even in excess of

50% valuation discounts for transfers . These discounts are situation

specific, and often are met with significant IRS resistance . Business

owners considering discounted transfers would need to work with

their tax and legal advisors to help determine, document and defend

a discounted value .

Estate “Freeze” Techniques

For business owners desiring to transfer ownership that may face a

taxable estate ($11 .18 million in 2018), there are several techniques

designed to lock in or “freeze” the value of the business for transfer

tax purposes . Two common techniques are Grantor Retained Annuity

Trusts (“GRATs”) and sales to an Intentionally Defective Grantor Trust

(“IDGT”) .

G R A T sA GRAT is a federally recognized trust arrangement where the grantor/

creator of the trust (for our purposes, the business owner) moves

assets to the trust . The trust provides that the grantor business owner

retains an annuity payment back from the trust of some identified

value for a term of years (two, four, ten years, whatever is decided) .

At the end of the trust term, after the full annuity payments have

been made to the grantor business owner, any remaining assets in

the GRAT pass to the trust beneficiaries (for our purposes the family

member or valued employee) .

To understand why a GRAT can be a useful succession planning

technique, one must understand the math of a GRAT . At the time a

GRAT is created you must calculate the present value of the future

annuity payments for the grantor and the present value of the

remainder assets when the trust ends . This calculation is determined

by a formula based on a government provided rate of return, called

the “7520 rate” . Utilizing the calculation, any remainder value expected

to pass to the trust beneficiaries is considered a taxable gift . This gift

does not qualify for the annual exclusion because it is a gift of a future

interest .

Let’s consider an example . If the grantor put $100,000 worth of

company shares into the business and retained an annuity stream that

has a present value of $90,000, this calculation leaves us with $10,000

remaining for the GRAT beneficiary . Consequently, the grantor will

have made a $10,000 gift and will have to pay gift tax (or apply the

lifetime exclusion amount, currently $11 .18 million) on a properly filed

federal gift tax return (Form 709) when creating this GRAT .

With this math in mind it is easier to understand the value of a

GRAT . Using our example above, let’s assume the company shares

appreciated greater than the original estimates and instead of $10,000

in the trust when it ends there is $30,000 . Since any tax was calculated

and paid at the beginning of the GRAT term, the trust beneficiaries

receive $30,000 worth of shares for only a $10,000 gift tax consequence


in this example . In essence, the grantor has “frozen” the value of the

gift for gift tax purposes at $10,000, and any growth in excess can pass

gift tax-free . If the GRAT performs worse than expected, the opposite

is true . Assume at the end of the GRAT only $5,000 remained . In that

example the grantor paid $10,000 in tax consequence only to actually

transfer $5,000 .

Consequently, assets that are expected to grow significantly in value

and/or assets that generate a lot of income are prime candidates for

GRAT planning . Because these are moving targets many practitioners

create several GRATs that mature over time, sometimes referred to as

“rolling GRAT” plan . For example, they may create one GRAT lasting

10 years, another with an 8 year term, then others with 6, 4, and 2

year terms . This allows each GRAT to be “rolling” so when years of

high growth occur and the opportunity to transfer that growth per

the GRAT plan materializes, there is always a GRAT vesting to the

beneficiaries . It also helps hedge the risk if assets underperform .

Some practitioners work the numbers for the annuity payment so

that when you use the government’s calculations you have a zero

remainder for the trust beneficiaries . These are known as “zeroed out”

GRATs . The calculation is more complex than this example, but let’s say

· Creates the trust· Transfers assets to the trust

· Receives remaining trust proceeds at

end of GRAT term

Assets remaining after annuity payments pass to beneficiaries

Makes Annuity payments back to the Grantor for term of years

Grantor UltimateBeneficiaryGRAT

we’re funding a $100,000 GRAT, with an assumed 2 .5% rate of return,

and the annuity payments are $52,500/year for two years . This could

roughly end up with a $100,000 present value for the grantor and a $0

present value for the remainder . Consequently, there is no taxable gift

for creating such a trust . But if there are any dollars left over because

the trust “outperforms” the expected rate of return, such assets would

pass transfer tax-free to the trust beneficiaries .

GRATs are not without risk . First, if the grantor dies during the GRAT

term, the entire value of the GRAT is pulled back into the grantor’s

estate for estate tax purposes, thus thwarting any potential transfer

tax advantage .

For the zeroed out GRAT, many proponents say that there is “no risk”

because if the shares don’t appreciate, you end up back where you

started . However, there are administrative and legal costs to create

and maintain these trusts, constituting an expense beyond the

transfer tax concerns .

Lastly, the federal government recognizes that the rolling GRAT

technique can potentially limit transfer taxes . The government also

strictly scrutinizes zeroed out GRATs . As such, some members of


Congress and President Obama have proposed a minimum ten year

term for GRATs and proposed to eliminate zeroed out GRATs . Should

this occur, having a longer term would mean a rolling GRAT technique

would have greater risk of failing should the grantor die during the

GRAT term . Eliminating the zeroed out GRAT would mean every GRAT

would have a transfer tax consequence .

GRATs can be considered as a potential gifting and estate freeze

technique, but the GRAT’s success may only work in appropriate

specific situations . Business owners should confer with their tax and

legal advisors before considering whether a GRAT is appropriate .

Utilizing an Intentionally Defective Trust

Another estate “freeze” technique for business owners is to sell

business shares to an Intentionally Defective Grantor Trust (“IDGT”) .

An IDGT is a special trust designed to keep the assets held in that trust

outside of the grantor business owner’s estate for estate tax purposes,

but designed to require the income tax owed for assets held by the

trust to be paid by the grantor .

In a typical IDGT the grantor creates the trust for the benefit of their

selected beneficiaries . The grantor cannot benefit from the trust,

cannot be the trustee, and the trust must be irrevocable once created .

With these provisions, the trust is designed to be out of the estate of

the grantor .

Then there is the “intentionally defective” aspect of the trust . In an

IDGT the grantor typically retains a right pursuant to the IRS tax code,

usually an administrative right via IRS code section 675, which causes

the income tax liability of the trust to be a liability of the grantor . In

other words, the trust earns and retains the income, but the grantor

pays the income tax for that income out of their own pocket . That

payment of tax is not a gift to the trust or any of the beneficiaries;

rather it is simply a tax liability the grantor must pay .

Using an IDGT for business succession purposes is typically done by

business owners with a high likelihood of facing an estate tax, and

that have enough net worth to pay the income tax liabilities on the

trust assets . Businesses with high growth potential and/or businesses

that generate a lot of income are good candidates for an IDGT . In this

scenario the business owner would create the trust for the benefit

of the successor business owners . When successful, an IDGT allows

the assets inside of the trust to grow outside of the grantor business

owner’s estate, and allows the grantor business owner to lower their

personal estate value by paying the income tax liability on the IDGT .

The beneficiaries of the trust can then receive the income from the

trust “tax-free” in that the grantor will have paid the tax liability .

While the business owner can gift shares of the business to an IDGT, a

more common approach is a sale of assets to an IDGT . This sale needs

to be an arm’s length transaction, otherwise the IRS could argue the

transfer is really a gift for gift tax purposes . For this, some general

guidelines are often followed by the parties creating the transaction .

First, the sales price must be adequate . As discussed above, the price

must pass the willing buyer/willing seller test .

Next, the trust needs to be a viable purchaser . In other words, the

trust needs to have enough assets to evidence a “down payment .”

Most practitioners recommend at least 10% of the transaction costs .

For example, if you are selling a $1 million share of the business, the

trust needs to own at least $100,000 of assets before the sale . The logic

behind this is that trust needs to be a viable entity . An arm’s length

transaction typically would not be accepted for a $1 million share if

the buyer has no known assets . In many transactions, the $100,000 is

gifted to the trust well before a sale takes place .


In the transaction the grantor business owner usually takes back a

promissory note from the trust for the payments due on the sale .

Again, this note must be at a reasonable interest rate and contain

reasonable terms for the transaction . Having terms too favorable

could cause the technique to fail .

If the IDGT sale works it allows the business owner to “freeze” the

value of the assets sold to the IDGT for estate tax purposes . After the

transaction the grantor business owner has removed the business

shares from their estate in exchange for a fixed value promissory

note . Should the business highly appreciate and/or generate lots of

income, it happens outside of the selling business owner’s estate

and inside the trust . For the selling business owner, they simply

hold the promissory note in their estate at its predictable value . It

is also possible to apply discounting to the assets sold to the trust,

as discussed above, to further leverage the transaction . Lastly, as the

selling business owner continues to pay the income tax liability for

the trust they continue to lower the value of their estate by these

obligations .

IDGTs are complex to create and administer . They typically involve

large taxable estates and require ongoing management and oversight .

They can also be a very effective estate planning strategy . Work with

your tax and legal professionals to weigh whether this technique can

meet your succession planning and estate planning goals .

B R I N G I N G I T A L L T O G E T H E RNone of these sales or gifting techniques are stand-alone features,

nor is this brief list of techniques exclusive to the many succession

planning methods available . It may be that an owner does some

gifting of shares partnered with an outright sale, ESOP, sale to a

defective trust, etc . Depending on the method used and the asset

transferred, discounting may also be available . In short, there are

multiple creative ways to address business succession planning . If

you own a business, consider working with your Benjamin F . Edwards

Financial Advisor, in partnership with your tax and legal advisors, to

determine whether business succession planning is appropriate

for you . At Edwards we can help with planning strategies, we have

investment banking opportunities should a sale be considered, and

of course we have many financial products available to assist with

your chosen solution .

Review your plan to see if everything is in order, or if you don’t have

a plan, consider implementing a plan that is right for you . You’ve

worked hard to create the business; work just as hard to make sure it

survives for years to come .

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Important Disclosures

The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is

not guaranteed . This piece is intended to provide accurate information regarding the subject matter discussed . It is made available with the

understanding that Benjamin F . Edwards & Co . is not engaged in rendering legal, accounting or tax preparation services . Specific questions

on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional .

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