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A Succession Planning Overview

Learn about operational and financial aspects of succession planning for your business. Discover strategies to secure your retirement and protect your company's future. Get expert advice from Joseph Kirgesner, CPA, CVA, CFF, MBA. Explore options like non-qualified deferred compensation, family pass-through entities, certain types of trusts, and real-life examples for effective succession planning. Ensure a smooth transition and maximize wealth preservation for your business legacy.

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A Succession Planning Overview

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  1. Plans Are Worthless, Planning is Essential! A Succession Planning Overview Presented by: Joseph Kirgesner, CPA, CVA, CFF, MBA jkirgesner@applegrowth.com

  2. Succession plans must include: * OPERATIONAL (How are you going to be able to retire?) • Who can carry on the company’s vision? • Using Advisory Boards (visit applegrowth.com) * FINANCIAL (How are you going to be able to retire?) • How much is my company worth? • Who are the buyers? Do I have options? • What are the triggering events? • How is the price going to be paid? 2

  3. Non-Qualified Deferred Compensation • Similar to a 401k without current corporate tax deduction • No current outlay of cash by company • Unsecured promise to pay earned compensation in later years • Employee must have "substantial risk of forfeiture“ • May be discriminatory • Useful for retiring owner AND key employee • all subject to FICA tax in year of vesting • not subject to 0.9% PPACA surtax (of city) when paid • tax deductible income stream to owner after retirement • reduces FMV of common stock • may reduce IRS unreasonable compensation challenge – past and future • only PV of compensation subject to FICA, Medicare and City taxation • 83B election for key employee may allow capital gain 3

  4. FAMILY PASSTHROUGH ENTITIES / FLPs or LLCs • General partner has 100% control and very limited equity • Limited partners have no control and significant equity • LP interests are generally creditor-proof, and non-marital • useful for some interfamily transfers (C corps, LLCs, partnerships) • may be preferable to irrevocable trusts • Discounts available for gifts of closely-held investments • Combined discounts may range from 20% to 40% or more (lack of marketability, lack of control) • Income splitting with next generation • Typically no self-employment tax on LP interests 4

  5. Certain Types of Trusts • Three parties to the Trust • Grantor (settlor) - contributes assets • Trustee(s) - manage assets while in trust in accordance with Trust Instrument • Beneficiaries - receive economic benefits of assets in Trust • Irrevocable Life Insurance Trust (ILIT) • Intentionally Defective Grantor Trust (IDGT) • Dynasty Trusts • Charitable Lead Trust (CLT) 5

  6. Example: $20 million family business • Create NQDC for executive at $200,000 year for 20 years • Transfer shares to FLP • Gift $5,120,000 LP interests in 2013 • Sell remaining LP units at fixed note 2.25% AFR Results • Executive gets $800,000 annually for ten years, then $200,000 for another ten • Estate & gift tax savings of $9,540,000 x 45% = $4,300,000 • All appreciation on 99% of company is transferred gift tax free • Executive remains in control of corporation 6

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