Rick Kozlowski

Rick Kozlowski

(802) 864-5756



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Estate and Tax Planning for the Business Owner

Estate Planning

Estate planning for the business owner involves additional issues that are not present in most estate plans.  Until the lifetime transition of the business is complete, the owner needs to plan for his or her untimely death.

The primary issue involves the disposition of the owner’s interest in the business.  Does it pass to the surviving spouse?  What if one or more children are involved in the business?  How does a bequest to one child affect the legacies for children who are not involved?  Thorny issues which require careful forethought.  In the absence of a well-developed plan, ownership may pass to unintended beneficiaries, which can diminish, if not destroy, the value of the business.

In addition to issues of ownership, the business owner needs to consider how the business will be managed after his/her death (or disability) (for a full discussion of management issues, click here).  The untimely death/disability of the owner is always a shock to employees and customers.  Simply put: Who takes control?  If ownership passes to a surviving spouse, that spouse may or may not be capable of handling day-today operations.  If ownership passes to a child, that child may not be ready to assume a leadership role.  If the owner is alive but incapacitated, who is legally empowered to run the business?  In some cases, it may be necessary to hire a professional to run the business, short-term, to avoid diminishment in value.  An “emergency” management plan is an integral part of any comprehensive estate plan.

Life/disability insurance can play a role in protecting the business by providing liquidity during the post-death/disability period.  Proceeds from such policies can ensure that sufficient cash is available to hire professionals and/or additional employees to fill the gap left by the owner’s absence, and to provide operating capital if there is a slump in business caused by such absence. 

If you need more information, I have devoted an entire website to estate planning in Vermont (www.vermontestateplan.com) and a webpage specific to family businesses.

Tax Planning

There are three basic taxes that impact the business owner -- income, gift and estate taxes.  
Proper planning can reduce the income tax paid by an owner during his or her life, on both the income generated by the business and on the sale/transition of the business.  Income taxes can be reduced by picking the proper form of the business -- “C” corporations being a notoriously expensive form in which t operate.  There are also subtle differences between operating as an “S” corporation and a sole proprietorship (or partnership, if you have partners).  Additional savings can be found in the correct use of certain deductions, tax incentives and credits, and other tax advantages sprinkled throughout the Internal Revenue Code.

Gift taxation plays a role in the owner’s plan if a lifetime transfer of some or all of the business is part of the plan.  Under current law, which is in flux, an owner can gift $13,000/year to any person and up to $1,000,000 during the owner’s lifetime without paying tax.  Coupled with other planning ideas, these limits present an opportunity to transfer significant value to children or other beneficiaries free of gift (and estate) taxation.  For more information regarding gifts and their tax implications, click here.
The law:  In 2009, a decedent could transfer $3.5 million without paying federal estate tax.  In 2010, there is no limit on the amount that can be transferred at death (at least as of the date of this webpage (9/1/2010)).  But, the law is scheduled to change, bringing back old (lower) exemption levels and higher tax rates.  In 2011, without new legislation, any estate over $1 million will be subject to estate taxation.

For the owner, an exemption level of $1 million may create severe hardships in planning for the transition of the business.  There are some protections built into the system that allows owners to defer the payment of estate taxes at favorable interest rates.  But the problem of paying the tax still remains.  Certain planning techniques can help soften the impact of estate taxes, including the use of life insurance, gifting programs and valuation discounts.  More information can be found at www.vermontestateplan.com ,by clicking here or by contacting me directly at the links on the left.






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