Tag: business succession planning

Prince Died Without a Will – Why Estate Taxes Get Complicated

What happens to the estate when someone dies without a will?

Usually when a famous person dies, news of their death travels fast, far and wide. Living relatives and those claiming to be relatives will come forward staking their claim on estate assets.

Signing Last Will and TestamentIf you die without a will or trust, you have died “intestate” and state law will determine how your assets are distributed. State law will provide a hierarchy of beneficiaries to which an intestate estate will be distributed. The state intestate succession law will only apply to those assets that would have passed through your will, known as “probate” assets, which you owned at the time of your death.

For example, some accounts you own may have named designated beneficiaries, such as an IRA or life insurance policy. Such assets will be distributed to the named beneficiaries. Also, joint assets and “paid on death” accounts will also pass to the joint or paid on death holder even if there is no will.

If you die without a will in New Jersey, determining who gets what depends upon factors such as: do you have a living spouse, children, parents or other close relatives. It can get complicated with blended families, children from multiple marriages, half and whole siblings and their decedents. Click here to see the NJ intestate succession law. In NJ, if you die without a will and do not have any close family your property will “escheat” to the state coffers.

Dying without a will is costly

Unless your estate is insubstantial, if you die without a will the Surrogate Court will appoint an estate administrator. It is the administrator’s responsibility to secure your assets, pay any debts and taxes as well as search for any heirs. Administrators will be paid by the estate for their services.

Prince’s estate could be worth in excess of $150 million and most likely will earn millions over years to come. At the time of his death, he was known to have a sister and half-siblings. His parents were deceased and he had two ex-wives. Rumors surfaced that he may indeed have a child born out of wedlock and at least one individual claimed he was Prince’s son. Under Minnesota inheritance law all siblings are treated equally. Without a will and clear instructions as to how Prince wanted his assets to be distributed, most likely there will be a will contest over the estate.  Litigation is expensive. The attorneys are sure to benefit along with the State and Federal governments due to the lack of estate planning and tax minimization strategy he could have had in place.

Who should have a will?

If you want your assets to be distributed in a manner of your choosing, you will need a will or a living trust. Your will appoints an “executor” who you choose to be in charge of securing your assets, filing and paying any taxes, and distributing your assets as you have instructed. Of great importance, a will makes it easier for your loved ones to work it all out.

If you have minor children your will can provide for the guardianship of those children. A will can also provide an opportunity for estate planning, potentially reducing estate or inheritance taxes. You may believe your estate is not large enough to require a will. That may not be so true in a state like New Jersey that taxes estates in excess of $675,000 in addition to collecting an inheritance tax on certain family member beneficiaries. The process of preparing a will can also provide an opportunity to review designated beneficiaries on any retirement accounts and life insurance policies, and to determine if you have adequate life insurance coverage.

At KRS, we work with individuals in developing tax minimizing strategies for current taxes as well as estate tax planning, estate administration and estate tax compliance. Visit our website to download our executor’s checklist for more information regarding the estate administration process.

Structuring a Business Sale to Minimize Income Taxes

Many of the considerations in structuring a business sale are dependent upon the type of entity that operates the business.

For the purposes of this post, we will limit our discussion to sales of businesses operating in the corporate form, either as S or C corporations.

Tax Advice Puzzle Shows Taxation Irs HelpIn a business sale, the seller prefers to sell the stock representing the business ownership, but the buyer prefers to purchase the assets of the corporation. The seller wants a stock sale because it generates a capital gain, taxed at a 20% rate.  The buyer prefers to purchase the assets because the full purchase price is allocated to the assets purchased, creating tax deductions for depreciation and amortization.  In a stock purchase, the buyer steps into the seller’s shoes, receiving no tax benefit from the price paid until the business is sold.  This issue is usually resolved by compromise, sometimes involving a price adjustment.

C corporation vs. S corporation asset sales

There is a significant difference between an asset sale by a C corporation and an asset sale by an S corporation. Sale by a C corporation results in double tax because the selling corporation is taxed on the gain on the asset sale, and the shareholders are taxed on the distribution to them by the corporation.  Sale by an S corporation that has been an S corporation for at least five years preceding the sale is subject to only one level of tax.  Because S corporations are pass-through entities that do not pay federal income tax, the entire gain is passed through to the shareholders for inclusion on their personal income tax returns.

If your business operates as a C corporation and you are contemplating sale, you should consider making an S corporation election.  This will allow you to avoid a double tax, but only if the corporation has been an S corporation for at least five years prior to the sale.  If the five-year requirement is not met, the S election will be disregarded for purpose of the sale and the sale will generally be treated as having been made by a C corporation.

In certain circumstances, a sale transaction can be structured in which the seller is taxed at favorable capital gains rates and the buyer receives ordinary deductions for a large part of the purchase price. This would occur if seller had personal goodwill, such as customer or supplier relationships not owned by the corporation.  In this structure, the seller would recognize capital gain and the purchaser would deduct the price paid for the goodwill over fifteen years.

Learn more about selling a business

For more information on this, see my article which may be accessed using the following link: http://krscpas.com/wp-content/uploads/2016/02/Business-Sales-and-Personal-Goodwill-G-Shanker.pdf

This article is intended to present general concepts in structuring the sale of a business. If you are considering the sale of a business, you should contact a qualified CPA for specific advice.

Considerations in Buying a Business

 

I have helped many clients purchase businesses, and probably advised just as many to walk away from deals.  What makes a deal good and what are the important factors in evaluating the purchase of a business?  If you are considering purchasing a business, your goal should be to minimize the risk that you will overpay for the business.

businessman looking to successBuying a business is an investment decision, no different than buying stock in a publicly traded company. When investing in public company, you consider two factors; how much can you expect to receive in dividends and what do you expect the stock price to be when you sell.  Not all stocks pay dividends, but absolutely no sane person would purchase stock in a company if they expected the share price to go down during their period of ownership.

It is the same when you buy a business. The important factors are how much income will be available for distribution to you (the dividend) and how much will the business be worth when you are ready to sell (the share price).  The problem is, there is usually more uncertainty (risk) in a private business than in a public company.  As a purchaser, what can you do to understand and minimize the risk?

Consider the risk

Accounting records tell the story of a business, and speak for themselves. If the business does not have good accounting records that go back at least five years, that is risk.  The more explanations and stories that are needed to support the accounting records, the greater the risk.  I always tell clients that they should only pay for what the seller can prove.  As far as we are concerned, if income isn’t reflected on the books and reported on the tax returns, it does not exist.

Concentration risk is another important consideration. If the business is economically dependent upon a single customer or a few customers, a single product supplier, or a few key employees, the future of the business is risky.  What would the business look like if the important customer was no longer a customer, the single supplier could no longer supply product, or some key employees went to work for a competitor?  Could the business continue profitable operations if one or more of these events occurred?

More than a salary

If you buy a business and the only thing you get is a salary for working there, you are not buying a business, you are buying a job. Take the emotion out of your decision. You would be better off getting a job somewhere else and not putting your investment at risk. However, if you expect the business to grow, allowing you to receive more money in the future, and eventually sell the business for more than you paid, that is a different story and should be your goal.

I have touched on a few of the many things that must be considered in the purchase of a business. Before you buy any business, you should conduct thorough due diligence, which is usually performed by CPAs and attorneys experienced in business purchase and sale transactions.  This will help you understand the business, its risks, and provide the information that will allow you to estimate the value of the business.

If you’re buying a business and have questions about the risks involved, contact me at 201.655.7411 or [email protected]