Business Solutions

Executive Benefits » Business Estate Planning

 

Business Estate Planning:
Owners of closely-held businesses have much of their wealth tied up in their businesses and therefore have a high degree of liquidity risk. To reduce the potential for future liquidity and estate problems, business-oriented planning tools can help reduce estate taxes and make the best use of the cash available. The most common business estate-planning tools are buy-sell agreements, Section 303 stock redemptions, Section 6166 estate tax deferrals, and the qualified family-owned business exclusion.

Business Valuation for Estate Planning
The determination of the value of the business is a key step in the estate planning process regardless of what technique is selected. In the case of a buy-sell agreement, owners need to know the value of the business to determine the price and fund the agreement. Since the business is part of an owner's estate, the valuation is needed to estimate the estate taxes; which helps calculate the liquidity needed to administer the estate. Finally, the value of the business must be reported on the estate tax return when the owner dies.

Section 303 Stock Redemptions
The business may be able to help pay estate taxes and settlement costs if an owner's stock is worth more than 35 percent of their adjusted gross estate. Under a Section 303 stock redemption, the business redeems some stock from the estate to produce cash to meet the estate's obligations. This can provide the liquidity survivors need to pay funeral costs, estate and administrative expenses, and state and federal death taxes. The maximum amount that can be paid under such a plan equals the total amount of the federal estate tax, state death taxes, funeral and administrative expenses.

Section 6166 Estate Tax Deferrals
Internal Revenue Code Section 6166 was designed to prevent the liquidation of a closely-held business due to an estate tax burden. If the business interest constitutes more than 35 percent of the owner's adjusted gross estate, under Section 6166 the executor may elect to pay the estate tax attributable to the value of the business in 10 annual installments, beginning no later than five years after the date of the owner's death. There are a number of requirements that have to be met to be eligible for the Section 6166 extension.

Qualified Family-Owned Business Exclusion
If a business qualifies as "family-owned," the owner may be able to exclude part of it from estate taxation. The amount excludable is $300,000 if the death occurs in the year 2006 or later. The business qualifies as family owned if the business comprises more than 50 percent of the owner's total estate and is passed on to a "qualified heir." A qualified heir is generally defined as a spouse, child, grandchild or other descendent. The heirs, however, must hold onto the business for at least 10 years following such an estate transfer or they may have to pay the full estate taxes that were avoided.

 

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