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Ask the Lawyer: About Estate Planning
Q: What steps should I be taking to ensure the continuation of my custom home building company after I retire — and should I be concerned about the federal estate tax?
A: Personal estate planning and a business continuation plan are measures that a responsible business owner should undertake for the sake of your family and your employees and their job security.
Get the Advice of an Estate Planner
Every person's financial profile is unique, so we recommend that you consult with an estate planning professional who will be able to provide advice on what best suits your interests and needs.
Enter Into a Buy-Sell Agreement
A buy-sell agreement is a contract to purchase and transfer a business if an owner or co-owner retires, dies or becomes disabled (specify what constitutes a "disability" in the agreement) and ensures the continuation of a business. The buy-sell agreement can be made with a co-owner, family member or members, key employees or other parties of interest.
A buy-sell agreement assures that your estate will be sold at a fair price. It also allows you to pick a successor who will be compatible with your family, your employees and your co-owners.
The agreement specifies how the sale of the business will be funded ― typically through life insurance, disability buy-out insurance or a secured loan payable to the estate. The terms of the agreement may be mandatory (upon the death of the owner). They may also give a prospective purchaser the right of first refusal (say, in the event of an owner's retirement).
You’ll also want language in the agreement determining how your business is to be valued. This is important, not only for tax purposes, but also to assure that the estate is receiving —and the purchaser is paying ― a fair price. The agreement should provide periodic price updates using recognized methods, such as book value, appraised value or formula valuation.
Don’t try an agreed fixed price if your buy-sell agreement is with family members. The IRS will probably disregard your stated fixed price and re-evaluate how much your business is worth for tax purposes.
Don’t Forget a Will
A will specifies who will receive what property from your estate. Should you die without one, intestate (without a will) succession will be determined by your state’s laws and regulations. This could lead to multiple ownership of your business and disputes between your heirs over how you property and business will be divided. Intestate succession may even require your business and other property to be sold piecemeal at auction ― unless an acquiring owner can be located in fairly short order. So a will is critical to the continuation of your business
The Federal Estate Tax Should Be of Lesser Concern in the Short Term, But …
Should you worry about the federal estate tax? It depends.
The federal estate tax is being gradually phased out over a 10-year period ending in 2010 when, by law, there will be no federal estate tax. However, unless Congress acts to either extend the phase-out period or to make the elimination of the tax permanent, the estate tax will automatically be revived in 2011 — at the 2001 tax rate and 2002 exemption level. See the chart below:
|
Year |
Exemption |
Maximum Rate |
|
2001 |
$675,000 |
55% |
|
2002 |
$1 million |
50% |
|
2003 |
$1 million |
49% |
|
2004 |
$1.5 million |
48% |
|
2005 |
$1.5 million |
47% |
|
2006 |
$2 million |
46% |
|
2007 |
$2 million |
45% |
|
2008 |
$2 million |
45% |
|
2009 |
$2 million |
45% |
|
2010 |
No federal estate tax |
n/a |
|
2011 |
$1 million |
55% |
So, for estate planning purposes, tax avoidance should be of a lesser concern for the next few years. But, be prepared to revisit your estate planning professional in 2010 if it appears that congressional inaction will allow the estate tax to re-emerge.
If you have questions for Ask the Lawyer, click here.
There is no guarantee that your question will be answered in this format, so if you have a particular legal concern that requires immediate attention, contact the NAHB Legal Research Service at 800-368-5242 x8491.
"Ask the Lawyer" is a service of the NAHB Legal Action Committee and NAHB Building Products Issues Committee (members-only links). The information provided is intended to familiarize you with the law in this area. It is not intended to be an exhaustive presentation of legal information on this particular subject, and in no way constitutes an opinion of law. Your own attorney must review this information to determine how it may apply to your particular situation.
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