Author: Onsager Law Office

What is the Estate Tax Anyway & Estate Tax Update under the Introduced 2017 Federal Tax Cuts & Jobs Act

First, you may be wondering what federal estate and gift taxes even are?  Federal estate and gift taxes have been created to tax the transfer of substantial gifts during life (gift taxes) and at death (estate taxes) from one individual to another individual or entity.

Under current federal law, each individual has a lifetime exemption of $5.49 million against combined federal estate and gift taxes.  In other words, one individual can transfer $5.49 million over his or her lifetime and at death to family or anyone or anything else and pay nothing in federal estate and gift taxes.  As a result of the level at which the current lifetime exemption has been set, these taxes do not apply to most Americans.

There are also some additional ways in which individuals may shield their asset transfers from federal estate and gift taxes under current law:

  • First, there is an unlimited marital deduction from federal estate and gift taxes.  As a result, when the first spouse dies, regardless of the size of the estate, there is no federal estate or gift tax applied against amounts that are transferred from the deceased spouse to the surviving spouse.
  • Second, current law permits the deceased spouse to transfer any unused exemption against federal estate and gift taxes to the surviving spouse.  As a result, a married couple effectively has a $10.98 million lifetime exemption against federal estate and gift taxes.  In other words, a couple can transfer $10.98 million over their collective lifetimes to family or anyone or anything else and pay nothing in federal estate and gift taxes.
  • Third, under current federal law, an individual may make a gift of up to $14,000 annually to another individual or entity free of estate and gift tax.  Provided the annual gift is $14,000 or less, the gift will not reduce the individual’s $5.49 million lifetime exemption against federal estate and gift taxes.  This annual gift tax exclusion is per individual, so a married couple can make annual gifts of $28,000 per child that are estate and gift tax free in the year that they are made and these gifts will not reduce the couple’s collective $10.98 million lifetime exemption against federal estate and gift taxes.

Under the federal Tax Cuts & Jobs Act, as introduced, the House of Representatives Ways and Means Committee majority tax staff indicates that the individual lifetime exclusion amount against estate taxes would increase from $5.49 million in 2017 to $10 million for tax years beginning after 2017 (or a $20 million lifetime exemption for a married couple).  Beginning after 2023, the federal estate tax would be repealed.  As a result, after 2023, an individual could transfer an unlimited amount of accumulated wealth at death, estate and gift tax free.  They estimate that these phased in changes would result in $172.2 billion in reduced federal taxes over the period 2018-2027.  The loss in federal revenue due to this change would be even higher if the change was not phased in.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

Consider your lease arrangement when buying or selling your small business

There can be a number of considerations for small business owners in regards to their leased business space when contemplating the sale of the business.

For a retail or service business, maintaining continuity of physical presence can be valuable for the business after the sale.  With the loss of the current owner’s personal network that has helped to feed the business, the continuity of physical presence can be one factor to continue to bring in business after the transition.  Do you have quality retail or office space that reflects well on the business and that works well for your staff to complete the work that must be done?  Have you locked in a longer-term lease that will permit the future buyer to continue to reap these benefits, including the benefit of continuity of physical presence, after the sale?  If you can’t say yes to these questions, what ground work can you lay now to increase the value of your physical space to a future buyer and thereby increase the value of your business?

For a manufacturing enterprise, to what degree has the company locked in a longer-term lease for space that is built out to meet the needs of the business now?  To what degree can the space accommodate the needs of the business as it grows?  Again, have you locked in a longer-term lease that will permit the future buyer to continue to reap these benefits after the sale?

Alternatively, in your situation are there one or more reasons why a future buyer might value being able to escape your current lease and move the business?  For example, is it likely that you might sell your business to a competitor who might be apt to consider consolidating operations?

It is not uncommon for a small business owner to own the office, retail or manufacturing space that is then leased to the business.  Do you also plan to sell the property to the buyer when the business is sold?  If not, the lease terms may need to be revisited or formalized when contemplating leasing the space to third party ownership after the business sale.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

What should I consider when hiring a business valuator/business valuation firm?

The infrequency with which most business owners engage business valuators, the potential tax issues associated with a business valuation, the cost of retaining a business valuator, the types of business valuations available, and trying to judge the appropriateness, experience, and work product of a particular business valutor, can make the process of selecting a business valuator imposing to many small business owners.  This blog post is intended as a starting point for small business owners who need to hire a business valuator/business valuation firm.

As a first step when retaining a business valuator, you may wish to consider his or her accreditation or credentials.  In my experience, one accreditation that business valuators will reference is their accreditation with the American Society of Appraisers (ASA).  One accreditation that you may wish to look for in a business valuator is whether or not the valuator is an Accredited Senior Appraiser with the ASA.  An Accredited Senior Appraiser will have five or more years of full-time appraisal experience (or its equivalent).  You can confirm the business valuator’s membership with the ASA by going to the ASA website and searching for the business valuator under the function entitled “Find an Appraiser.”

When comparing business valuators you may wish to consider the following additional questions/issues:

  • How many years of full-time business valuation experience does the business valuator have?
  • How many business valuations does the business valuator and/or his or her firm complete annually?  What is the typical level of complexity of these business valuations (and how does this complexity compare to the business owner’s situation)?  Of these business valuations, how many are calculation engagements vs. valuation engagements?  [For more information on the difference between calculation engagements and valuation engagements, check out our post entitled Small Business Appraisals–Calculation vs. Valuation Engagements.]
  • Business valuations represent what percent of the business valuator’s practice on an annual basis?  Business valuations represent what percentage of the firm’s business on an annual basis?
  • What type of business valuation would the business valuator recommend in the business owner’s situation, and why?
  • To what degree does the business valuator have experience providing business valuations in the business owner’s industry?
  • Are there important factors other than experience, such as service, reputation, communication skills, and education that may put one business valuator ahead of the others?

I would also suggest carefully comparing the pricing and billing approaches of the various business valuators you contact.  In my experience, there can be substantial variation in pricing and billing approaches for business valuation services.

Finally, when comparing business valuators, and when contemplating retaining a business valuator, consider carefully the terms of the contract under which you would retain the business valuator.  Among other substantial issues that may arise, you may wish to consider the following:

  • If the business valuator and his or her team are retained on an hourly basis, what protections are in the contract to avoid an unanticipated run-up of hourly fees?
  • Are there additional provisions in the contract that could lead to additional costs?  For example, does the contract provide for the possibility that the business valuation firm may retain outside qualified appraisers or other expert services in addition to their own services?
  • How does the contract address future services from the business valuation firm that may be provided after the initial business valuation is complete?

There is a lot to consider when retaining a business valuator/business valuation firm.  But the right valuator and valuation can be an important first step in selling your small business or small business interest.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

 

What do I have to do with the will after my loved one dies (or if I am the personal representative)?

In the midst of the grief, it can be overwhelming to deal with anything else after a loved one dies.  What do you have to do with the will?

In Wisconsin, any person having possession of a will must file the will with the proper court (typically the county court for the county in which the individual resided), or deliver the will to the personal representative, within 30 days after the person has knowledge of the death of the individual.  If the will has not already been filed with the county court, any person named to administer the will, i.e., the personal representative, must file the will with the county court within 30 days after he or she has knowledge that he or she has been named as personal representative, and has knowledge that the individual died.

But what if the individual created a revocable trust to avoid probate?  Do I still have to file the will with the county court?  The short answer is yes.  But just because the will is filed with the county court does not necessarily mean that there will be a probate proceeding.  If all of the individual’s assets were properly transferred to the revocable trust during lifetime, and if the trustee is diligent about addressing the final debts and bills of the individual, then there may be no need for a probate proceeding.

In Dane County, the court asks that a letter be submitted with the will indicating the date of death and whether or not the will will be probated.  When filing the original will with the court, you may consider making a copy of the will that the court can date stamp for your records.

What happens if a will is not properly filed with the county court as required?  If, without reasonable cause, you failed to file the will with the county court as required, you may be liable to beneficiaries under the will for damages they suffer that were caused by your “neglect.”

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

Business Valuation Methods and the Role of the Business Owner in the Valuation Process

There are three basic approaches that appraisers take to determining the value of a small business interest: (a) cost approach; (b) earnings approach; and (c) market-value approach.  Within each approach, there are multiple methods to arriving at a valuation of a business interest.

The cost approach estimates the value of the business based on the net value of its underlying assets.  Under the cost approach a value is assigned to each tangible and intangible asset owned by the business.  The sum of the liabilities of the business are also determined.  The sum of its assets minus the sum of its liabilities represents the net value of the business under the cost approach.

Under the earnings approach, an appraiser will place a value on the business based on the present value of the future estimated earnings of the company.  An appraiser may look at either a company’s past history of earnings or project future earnings in arriving at a value of the business under the earnings approach.

An appraiser utilizing the market-value approach will determine the value of a company by analyzing the sale price of comparable businesses or the value of publicly-traded stock of companies in the business’ industry.

An objective appraisal will typically be a watershed moment for both buyer and seller in determining the value of a small business interest.  As different valuation methodologies have their advantages and drawbacks, and as each business is unique, an appraiser will often look to multiple valuation methodologies in estimating the value of a business.  While a qualified appraiser best understands the art and science of developing an appraisal, the business owner is the one who most intimately understands the business being appraised.  As a result, it is worth taking the time to carefully review and ask questions when receiving the initial draft appraisal to ensure that the business owner conveys to the appraiser key information about the business that the appraiser may or may not have fully appreciated when developing the initial draft appraisal.  The draft appraisal permits the opportunity for this exchange to occur before the appraisal is finalized.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

Small Business Appraisals–Calculation vs. Valuation Engagements

It can be very daunting for a small business owner, or a would-be small business owner, to consider buying or selling a small business.  One issue that can be particularly overwhelming is trying to determine the value of the small business.  An appraisal of the business is often the resource that will be looked to by both buyer and seller, to at least establish a starting point for determining the value of a small business.

In retaining a business appraiser, the small business owner will need to decide what kind of appraisal to order, a calculation engagement or a valuation engagement.  A calculation engagement is a less involved business valuation.  While a calculation engagement will use one or more methodologies to estimate the value of the business, the valuator may express no formal opinion or conclusion of business value as the estimate may not be the product of all of the steps that the valuator believes should be undertaken to provide the most accurate or reliable estimate of value.  A valuation engagement, on the other hand, is a well-developed business valuation that should represent the valuator’s most accurate or reliable estimate of value.  In lieu of speaking of calculation or valuation engagements, valuators sometimes also speak in terms of oral reports (least formal and developed), summary letter reports, or full narrative reports (most formal and developed).  Valuation engagements or full narrative reports are often requested when the report is to be relied on by third parties, such as the IRS or a lender.

In considering what type of appraisal to order, it can be worth taking the time to determine what type of report key third parties, such as a lender, may require.  Not surprisingly, a valuation engagement or full narrative report will typically costs thousands of dollars more than a calculation engagement, even for a relatively small business interest.  Sometimes business owners can begin with a less expensive, less formal, calculation engagement, and subsequently upgrade to a valuation engagement if needed.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

What a Will or a Trust Cannot Transfer–Payable on Death Bank Accounts

It is very important for individuals and couples to keep in mind what their wills or trusts can and cannot do, in terms of directing the distribution of their estates after they die.  In particular, it is important for them to keep in mind what assets they own that will not be governed by the provisions of their wills or trusts.

Under Wisconsin law, one or more individuals, including married couples, are authorized to enter into a payable on death (P.O.D.) contractual arrangement with a financial institution for such things as a checking account, savings account, or a certificate of deposit.  Upon the death of the account’s owner(s), the account balance subject to the beneficiary designation passes to the beneficiary specified by the account owner(s) to the financial institution.  This beneficiary designation will control notwithstanding contrary provisions in a will or a trust that the owner may have intended to govern the distribution of this account.  As a part of estate planning, it is important to coordinate the various assets, beneficiary designations, and will or trust documents to ensure that your intent is effectuated.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

What a Will or a Trust Cannot Transfer–Joint Tenancy and Survivorship Marital Property

It is very important for individuals and couples to keep in mind what their wills or trusts can and cannot do, in terms of directing the distribution of their estates after they die.  In particular, it is important for them to keep in mind what assets they own that will not be governed by the provisions of their wills or trusts.

Under Wisconsin law, property, typically real property (i.e., your home or lake house if you are so lucky), owned  in joint tenancy or as survivorship marital property, will not pass as specified under your will or trust, but will instead pass to the other joint tenant(s) or to your spouse on your death.  If it is important that your will or trust direct some other distribution of the property, then the form of ownership of the property itself will need to be changed.  The right approach for addressing this issue may vary depending upon your circumstances.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

Creating a Market for Selling a Closely Held Business Interest

It can sometimes feel overwhelming, if not impossible, for small business owners to find a buyer for their small business interest.  This can be particularly true if no family members are involved, or interested, in taking over the business.  However, identifying a buyer for your business interest can be a crucial undertaking to realize on the value of your lifetime of work.

How do you identify the subset of entrepeneurs who might appreciate the potential and value of your small business?  In many cases, these are likely to be the same entrepeneurs who understand your industry.  How do you identify the entrepeneurs who not only understand the potential of your small business, but have the financial means to purchase it?

Planning ahead can make all the difference for small business owners.  A promising source of buyers for a small business owner, may be the business owners’ own partners or employees.  Frequently, they are more likely to value and appreciate the potential of the business, and their understanding of and experience with your business puts them in a position to best realize the potential of your business.

If you have never had a co-owner, perhaps it may be worth considering selectively adding co-owners to both grow the business, and potentially help create a market for your business interest down the road.  Do you have fellow business owners or employees who might capably take over the business, but do not have the financial wherewithal to do so?  Depending on your situation, perhaps a buy-sell agreement funded with life insurance might be a solution.

Plan ahead.  Plan ahead.  Plan ahead.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]

S Corporation Restrictions on Debt and Raising Capital

It can be common (and certainly understandable) for both business owners and their accountants to primarily focus on minimizing taxes when deciding in what form to do business and whether or not to make an S corporation election with the IRS.  An important advantage to an S Corporation election can be the avoidance of double taxation of income (once when the corporation is taxed for this income and once when shareholders are taxed for the distribution of this income as dividends), while still retaining other benefits of incorporation.

However, when considering whether or not to make an S Corporation election to avoid the double taxation of income, business owners may also wish to consider the restrictions on debt and ownership of S Corporation shares imposed by the federal government, and the implications of these restrictions for raising the necessary financing for their business.

S corporations may not have more than one class of stock.  This limitation, for example, will preclude the creation of a second class of preferred stock which may limit the options for certain businesses to raise capital.  [Remember that preferred stock generally entitles the holder to a fixed dividend, the payment of which takes priority over any dividends paid to holders of common stock.]

S corporations generally may not have more than 100 shareholders, only certain types of qualifying trusts may hold S corporation stock, nonresident aliens may not be shareholders, and other corporations and partnerships may also not be shareholders.  These ownership restrictions may limit the ability of certain businesses to raise the necessary equity capital they need, either in the short- or long-term.

Finally, in enforcing the requirement that S corporations may only have one class of stock, the federal government places restrictions on the types of debt that may be incurred by an S corporation.  S corporations are only permitted to have what is referred to as “straight debt.”  Straight debt means a written, unconditional promise to pay a fixed amount of money on demand or on a specified date provided that: (a) the interest rate and/or payment dates are not dependent on business profits or the discretion of the borrower; (b) the debt cannot be converted to stock; and (c) the creditor is generally an individual, an estate, a qualifying trust, or a person who is actively and regularly engaged in loaning out money.  Again, these straight debt restrictions may limit the options of certain businesses to generate the financing they need.

Take the time to understand what form of doing business is right for your venture, including whether the benefits of any S corporation election outweigh the imposed restrictions.  Do you want to know more about estate planning considerations when deciding on an S corporation election with the IRS?  Consider the following two additional posts: (a) Contemplating S Corporation Status?  Consider Estate Planning Flexibility and Restrictions on Ownership; and (b) Contemplating S Corporation Status?  Consider Estate Planning Flexibility and Preferred Stock Limitations.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]