business succession

Business Succession – Where to Start

You’ve spent a lifetime building your business and now it’s time for retirement. So, where do you begin?  When developing your business succession plan, it’s important to consider all of your options because each will have a significant impact on your estate plan, taxes, family, and financial well-being.  Here are a few helpful tips to get started.

Valuation

Regardless of whether you sell to your family, third-party, or employee, you will need a comprehensive valuation of your business.  Many business owners commonly overvalue their business because they place an emotional value on the blood, sweat, and tears they’ve spent working instead of what the company is actually worth in the marketplace.  To avoid this common misstep, it’s imperative to get a third-party analysis to better understand what your company is actually worth, and who is willing to pay for it.

When evaluating, a third-party attorney or financial planner will consider several approaches to your company’s worth:

  • Market Approach – Revenue Growth, Profitability, Company size, and Liquidity
  • Income Approach –Revenue Growth, Profitability, Cost of Capital, Leverage; Working Capital Efficiency; Low Capital Expenditures
  • Asset Approach –Asset Intensive, Leverage, Scarcity, Time

After using all or one of these valuation strategies, you then must consider the most tax efficient method of selling while also providing a secured payment structure.

Let’s consider the following options:

Lump Sum

Selling your business for millions of dollars is every business owners dream.  However, this may not be a viable option for a number of reasons.  First, if selling to employees or family, the buyer will likely not have enough capital or credit to purchase your business’ asking price.  In addition, selling your business outright will result in a large capital gain and tax consequence compared to taking payments over time.  Most notability, it could actually place you in a different tax bracket entirely.   Thus, when considering selling for a lump sum, you should weigh the tax consequences of a lump sum with the potential stream of income over time.

Lump Sum + Installments

If a lump sum will create an unfavorable tax consequence, then you can structure the deal to take a smaller lump sum up-front, and then payments over time.  Most commonly sellers will take a lump sum that is just under the threshold of a tax bracket.  Installments can be made over a number of years that is consistent with your retirement plan.  Here you can increase the number of buyers by avoiding a high-cost lump sum for buyers.  In doing so, this may entice inside employees and/or family members who have worked hard within the company but cannot afford your asking price.  And because there is a partial payment up-front, buyers are motivated by their initial investment.

Installments Only

If selling to family and/or employees, installment payments are an affordable way to sell your business and avoid a lump sum tax burden.  However, business owners are often still involved using this method because employees don’t have as much “skin in the game.” This method often requires the owner’s expertise in maintaining operations.  In other words, you won’t get paid unless the business is able to sustain itself with its successors.  This strategy is recommended for smaller companies where the owners are able to work part-time and still have some degree of authority. It’s recommended that certain provisions be implemented that would cease payments in the event of a “dead beat” buyer/employee.

Self – Cancelling Installment Note

You can give your employees a business in exchange for a promissory note by using a “self–cancelling installment note.”   The promissory note is usually coupled with a personal guarantee signed by the employee.  Payments are then made over time but cease when the business owner passes away.  This option reduces capital gains and estate taxes.  However, the payments made will be set at a premium set by the IRS mortality tables to account for the business owners’ lifetime.  If the business lives past this time, the payments cease.  If the owner dies before this timeline, the payments cease.

For more information or to request a free consultation with a business and/or estate planning attorney, call Baron Law LLC at 216-573-3723 or dan@baronlawcleveland.com.

 

Estate Planning Attorney

COVID-19 Funeral Reimbursement

Did you know that you can be reimbursed for the funeral expenses of a lost loved one that passed from COVID-19? COVID-19 has affected the lives of many Americans and their families, reimbursement of funeral costs is a little way to ease the grief of losing a loved one from this pandemic.

The Federal Emergency Management Agency (FEMA) has started a program to reimburse those families that have lost someone due to the coronavirus. The application process starts April 12, 2021 and currently does not have an end date. To qualify you must meet the following requirements:

• The death must have occurred in the United States, this includes U.S. Territories and the District of Columbia
• The death certificate must indicate that the death was attributed to COVID-19
• The applicant must be a United States citizen, non-citizen national, or qualified alien who incurred funeral expenses after January 20, 2020
• There is no requirement for the deceased person to have been a United States citizen, non-citizen national, or qualified alien

Additionally, the following documentation should be gathered and kept for submission:
• An official death certificate – that attributes the death directly or indirectly to COVID-19 and shows that the death occurred in the United States, U.S. Territories, or District of Columbia
• Funeral expenses documents – (receipts, funeral home contract, etc.) that includes the applicant’s name, the deceased person’s name, the amount of the funeral expenses, and the dates the funeral expenses happened
• Proof of funds received from other sources – specifically for use toward funeral costs. We are not able to duplicate benefits received from burial or funeral insurance, financial assistance received from voluntary agencies, government agencies, or other sources
If approved, you will receive your funeral assistance through a check by mail or direct deposit, depending on the option you choose when applying for assistance.

Unfortunately, there are some people who cannot apply for assistance if they fall under one of the following categories:
• A minor child cannot apply on behalf of an adult who is not a U.S. citizen, non-citizen national, or qualified agent
• There are several categories of aliens that are lawfully present in the United States, but do not qualify for FEMA’s Individual and Households Program assistance, including this funeral assistance program. These include, but are not limited to:
o Temporary tourist visa holders
o Foreign students
o Temporary work visa holders
o Habitual residents such as citizens of the Federal States of Micronesia, Palau, and the Republic of the Marshall Islands

Please keep in mind there is no online application, this is through the FEMA funeral assistance hotline 844-684-6333. Once your application has been submitted via phone, you will be provided an application number and will need to submit your supporting documents (death certificate, funeral expense receipts, etc.). The supporting documents can be submitted the following ways:
• Upload documents to your DisasterAssitance.gov account
• Fax Documents
• Mail Documents

If you were responsible for the funeral expenses of more than one person lost to coronavirus you may claim each funeral on your application. The limits for assistance are up to $9,000 per funeral and up to $35,500 per application per state, territory, or District of Columbia.

This is a great program for families looking for assistance in the unexpected death of a loved one caused by COVID-19. For more information, please visit the link below. To schedule and appointment with one of our estate planning attorneys, contact Baron Law at 216-573-3723

Sources:
https://www.fema.gov/disasters/coronavirus/economic/funeral-assistance#eligible

Trust Attorney Baron Law

Five Reasons Why Having a Family Trust is Better Than a Simple Will

When planning for your loved ones, one common misunderstanding is thinking that you have to be ultra-wealthy to need or benefit from a trust.  While a common misconception, a lack of knowledge in this area can be costly. Even if your estate is fairly small, you still want to avoid the high costs and inefficiency of probate, as well as providing asset protection for your children.  Family trust planning can protect your nest egg while also providing several other advantages over a simple will.

  1. Family Trusts Avoid Probate

Having a simple will is better than having no plan at all; however, a simple last will and testament does not avoid probate.  Probate is a court system designed to administer your will and pay creditors.  Unfortunately, the probate court can be costly and time consuming.  In fact, according to the AARP, the average estate will lose between 5-10 percent of assets when administered through probate. Also, the minimum time to administer a will in probate court is six months, but the average time in most counties is eleven months.

If properly created, a Family Trust can seamlessly transfer assets to your heirs while avoiding probate. There is not a minimum time of administration, and there are no probate fees.  Additionally, there are no court forms to fill out, and probate court has no involvement in the administration.

  1. Asset Protection

If you have minor children, then having a Family Trust becomes a must. A minor child cannot legally inherit your assets.  Even if it were possible, most parents would consider it unwise for their seventeen-year-old child to receive a large sum of money.  Family Trusts provide asset protection by holding assets in trust for your children’s benefit.  Even when your children become adults, the trust still provides asset protection against creditors, litigation, and divorce.  For example, if you passed away leaving a large sum to your forty-five-year-old child who has spending issues, a pending litigation, or a divorce in process, the trust would hold the assets until your child is in a better place in life.

In addition to concerns about children, another common asset protection measure, given divorce rates over fifty percent, occurs when individuals are in their second marriage.  In this scenario, there is nothing preventing the remaining spouse from disinheriting children from a prior marriage.  Consider this example: Husband and Wife are in their second marriage.  The wife has two kids from a prior marriage. The husband has no kids except for step-children of the current marriage.  The wife passes away and leaves everything to her husband, and the contingent beneficiary naming her two kids.  Five years later, the husband remarries and creates a new estate plan naming his new spouse as primary beneficiary of his estate, the contingent naming his two step-children. Then the husband dies. The new spouse inherits everything and the children are accidentally (or in this case intentionally) disinherited.

Famous Last Words, “I would never get remarried!” In reality, this is a very typical example of the need for some level of control and strategy. A Family Trust in this example would solve the wife’s concerns entirely. And if this were not a second marriage, a Family Trust might still make sense for couples wanting to keep the estate within the family and avoid remarriage issues.  Moreover, the Family Trust in all circumstances would provide asset protection for children as mentioned above.

  1. Privacy

In addition to probate being time-consuming and costly, it is also public information.  Today, anyone can troll the probate docket observing how much money is in your estate, who the beneficiaries are, and what step in this long process you are in. This may sound harmless, but public knowledge can lead to scams against your beneficiaries, as well as placing information that you wouldn’t want available in cyberspace.  A Family Trust is a private design where only you and those you want involved will have access to your financial information and bequests.

  1. Control

Family Trusts provide control even after you have passed.  A simple will distributes assets outright as opposed to over time.  Family Trusts allow you implement conditions and asset protection strategies years after you have passed.  For example, you can dictate in your trust that your children will receive payments in thirds after achieving the ages of 30, 35, and 40.  Perhaps you have no children and you are leaving your assets to a sibling. In that case you can dictate that assets will not be distributed if your sibling is in a nursing home or receiving Medicaid.  Without a Family Trust, the assets in this second example would all go to the nursing home and/or would kick your sibling off their federal benefits.

  1. Efficiency

Family trusts are efficient and cost effective.  Although a Family Trust may cost more than a simple will to create, the amount of money saved after you have passed is worth the effort. Additionally, Family Trusts can be administered in a fraction of the time compared to probate. Finally, a Family Trust can be easily administered while creating a legacy for your family.

Helping You And Your Loved Ones Plan For The Future

For more information on Family Trusts or to schedule a free consultation, contact Dan A. Baron at Baron Law LLC at 216-573-3723 or dan@baronlawcleveland.com

About the Author:  Dan A. Baron is the founding member of Baron Law LLC focusing his practice to the areas of estate planning, business law, and elder law.   Dan was recently voted an Ohio Super Lawyer Rising Star, an award nominated by other competing attorneys and one that only five percent or less achieve.   Mr. Baron graduated with honors from Cleveland Marshall College of Law.  He holds a business degree from The University of Akron, cum laude, and is a member of the Cleveland Metropolitan Bar Association, West Shore Bar Association, Akron Bar Association, Business Networking Institute, and American Bar Association.  Dan is also a member of the estate planning section at the Cleveland Metropolitan Bar Association.

Probate Attorney

Top Reasons Why You Should Avoid Probate

Whether it was a gathering for a joyous wedding or the passing of a loved one, we’ve all heard about Probate Court at some point or another. We are going to dive into what probate is and why you want to avoid it when it comes to your estate, if you have no plan.

First, what is probate? Probate is the legal process of administering a person’s estate after their death. You’re probably wondering “OK, but what does that mean?” It means:

The court will determine your assets at the time of your death.

The court will determine the value of those assets.

The court will distribute the assets to those that are entitled to them by law.

Probate court, during the process will also appoint someone to supervise the administration of your estate.

Why would I want to avoid this process? The main reasons to avoid probate are the extensive timeline and astronomical expense that are both required for probate. The minimum amount of time that is required by probate court is 6 months, but in actuality this process takes 14 – 18 months on average. The reason for this extensive timeline is to give creditors a chance to make a claim on your estate, this in turn reduces the inheritance intended for your loved ones.

The probate process is very expensive. The average cost for probate court is between 5 – 10% of the estate’s total value. This means if your estate is valued at $500,000 you can expect an average cost of between $25,000 – $50,000.

The probate court appoints someone that they deem “suitable” to administer your estate, if you have no plan. This means that your wishes will not be heard and your assets, including your personal property and belongings will be distributed by the court to whom is legally entitled.

Lastly, probate court is public record. This means that all of your assets, your heirs, and your debts are available for anyone to see. Privacy is something that should be valued during this sensitive period of bereavement.

This costly and lengthy process can be avoided with a proper estate plan put in place. Your assets should be distributed according to your wishes, not to who is just legally entitled to them. Your heirs should have the ability to access the inheritance you intend on leaving them, and your loved ones deserve the privacy and time it takes to mourn your loss.

If you have not previously considered an estate plan or have questions about how to get started on planning, contact us at Baron Law today. You can go to our website for a free consultation to start planning for the future for yourself and your loved ones.

 Helping You And Your Loved Ones Plan For The Future

 

About the author: Kristy Gross

Kristy is a Legal Assistant at Baron Law LLC kristy@baronlawcleveland.com.