The clock is ticking

Listeners learned that the rest of calendar year 2012 offers tax advantages that may disappear on New Years Day 2013.  For example, the federal gift exemption currently sets $5.12 million as the “limit on what you can give to your family or leave to them at death without paying a tax,” according to Ms. Dempze.  The law that sets that amount automatically sunsets at the end of 2012.  After that, “we don’t know what it will be starting next year,” Ms. Dempze added.  “It could drop back down to a million [dollars],” the amount of the exemption that was in effect for years.

While a $10 million-plus exemption for a married couple may not seem like a lot, if you own a successful business or have valuable real estate, you might want to take advantage of the greater exemption while you can, she advised.  This may include “giving away a non-controlling part of your business.”

NOTE:  The federal Generation-Skipping Tax Exemption– also set at $5.12 million per donor for 2012 – may return to the $1 million limit.

The gift that keeps on giving

If 2013 brings a return to the $1 million gift tax exemption level per person, that could mean $8 million of additional exposure to gift tax or estate tax for a married couple who waits to make a gift.  Ms. Dempze said that another important thing about a gift “is that you get all of the appreciation in the asset out of your estate”.

“If you hang onto the business interest or real estate until you die and you’re in your 50s or 60s, you’ve got a doubling or tripling or quadrupling in value between now and when you die.”  If you give it away now, “all of that is out of the estate, tax free.”

The impact of this would be substantial if the current tax rates – also set to sunset at the end of 2012 – jump back to historic levels, as high as 50 to 55 percent for the federal estate tax.  There is another 14 percent on top of that potentially for Massachusetts taxpayers, for whom there is an estate tax but no gift tax.

Bottom line?  “The safest thing is to do something now,” Ms. Dempze said.
Mr. Marx agreed.  “Talk to your tax or estate-planning professional before the end of this year…or you’re going to lose a huge opportunity.”

Plan early…and often

As Ms. Dempze put it, the families that are successful in passing the family business down to the next generation are the ones that plan early.  “A lot of estate tax is avoidable with good planning,” she said.

Choosing the right executor is one of the most important steps in the planning process, Ms. Dempze, who grew up in a family-owned cranberry-growing business in Wisconsin, recommended.  This is the person who is going to be in charge of your estate after your death.

For a family business, this choice will affect “the people nearest and dearest to you in your life,” Mr. Marx said.  “Your family – and, if you have a business, your employees and your customers – are depending on that choice,” added Ms. Dempze.

“That’s why it’s so important,” she said, “for you to do a will and to keep it updated.”  If you don’t, Massachusetts law will kick in, and the court will pick an administrator for your estate based on your closest relatives, “which, in a lot of circumstances, are the last persons you would want to choose as your executor.”

To make a good choice, begin with an understanding of the job of the “personal representative,” as the executor is called.  As the person in charge of your estate, they may handle everything from making your funeral arrangements to making sure your business’s payroll is met.  Their job might also include preparing an inventory of your assets, bank accounts and investments, filing tax returns and the like.  On top of all of that, “they need to be good at communicating with your family, so they know what’s going on.”

There’s a lot more for the executor to address.  There may be, for example, estate taxes to be paid, an obligation that might raise liquidity issues.  Then, there’s the question of managing your investments, collecting debts owed to you and making payments when you owe.  Finally, assets in your estate must be distributed, and there might be issues unresolved by your will (e.g., Who gets the vacation home or the grandfather clock in the hallway?) that must be decided with the help of an executor.

Criteria? 

Pick someone you know and trust, someone who is detail-oriented, has a lot of common sense; a good communicator with good judgment.  The best executors are patient and willing to listen.

When you pick an executor, think twice about casually picking your spouse or a sibling.  Instead, consider picking someone who won’t be as emotionally affected by your death.  When picking as executor, remember that “this person is effectively going to be you,” as Mr. Marx put it.  They face each question as they imagine you would.

This underscores the importance of having a professional – perhaps even a co-executor – available to provide “the necessary back up,” Mr. Marx offered.  Another plus to this model, in Ms. Dempze’s view, is that it helps in situations where there’s a blended family or contentious, internal relationships.

In a nutshell, “Put the right people in charge” or build a team that has the right combination of strengths.

Frederic J. Marx   fmarx@hembar.com

Nancy E. Dempz    ndempze@hembar.com

According to Mr. Marx, there has been an uptick in acquisition activity as the nation’s economy has improved.  However, unlike many public corporations or private corporations with professional management, which might go through several mergers or acquisitions in their life cycles, a family business typically experiences a purchase or a sale one time in its entire history.  This underscores the importance of approaching M&A issues and negotiations deliberately, with outside counsel, and as free of emotion as possible.

Buyers and Sellers profiled

Listeners to the MYOB show will get a brief overview of the mechanics of a typical M&A transaction from the perspective of both the seller and the buyer, starting with when the decision has been made to sell or when an interest in selling first surfaces.

What happens next?  Most sellers talk with friends or business colleagues to get an idea of pricing as well as tips, where to find potential buyers and other advice.

Most sellers will learn that there are generally two types of buyers:

• A strategic buyer is someone looking to buy a business because there’s a strategic fit. They might be in the hunt for a company with a new product or territory or it may require a needed element in a particular technology.  The financial aspects tend to be less important in a strategic purchase/sale.

What’s important in a strategic purchase/sale is synergy. There’s a huge value added to the price when a purchase target has something to offer that can be added to the buyer’s mix.  Under the right circumstances, there might be a three or four-fold increase in strategic value as opposed to a straight, financial valuation.

Strategic sellers and buyers often find one another by networking and by word of mouth.

• A financial buyer looks almost exclusively at profit potential as expressed in the numbers.  A private equity firm or other financial buyer might start with your family business’s current or recent profits.  From there, they’ll factor in a certain amount or kind of build up and investment and, finally, predict a level of growth and profitability by a given date.

The product and the management of the purchase target are important.  But, as Mr. Marx puts it, “it’s really the numbers.”

Is there a way to predict whether a strategic buyer’s price offering will be over or under a financial buyer’s?  No, there isn’t, according to Mr. Marx, who cites studies that have tracked strategically-based and financially-based transactions.

Inherent inefficiencies of the marketplace

The reason it’s so hard to predict value, as he describes it, has to do with the concept of Gross Inefficiency.  Everyone bids with their own view of the deal and, as a result, the dynamics are unpredictable.  Perceptions of a company’s value from a strategic perspective typically vary from time to time and place to place.

Sellers, therefore, often don’t know if a buyer is at the high end or the low end of the strategic buying range.  In addition, for the seller to a financial buyer, it’s tough to make predictions because you typically lack comparables.

No such thing as a lost opportunity

Mr. Marx advised getting outside counsel for arm’s length advice.  This is particularly important for sellers, who tend to have a harder time separating themselves and their emotions from the deal.

He added that sellers would be well-served to approach any deal slowly and deliberately.  A patient negotiator often sees a deal collapse, only to be replaced later by another, better offer.  So, resist the urge to quickly take an offer merely as a means to gain “early parole” from your old business, something that often happens with family-owned businesses.

This can be likened to what happens during a courtship that leads – or doesn’t lead – to marriage.  Getting to know a potential partner requires spending time together, when preconceptions and biases are either confirmed or reversed.

Frederic J. Marx

fmarx@hembar.com

Yet, like many of us, I still have a list of charitable gift solicitations awaiting my attention.

The Internet has made it easier for donors to evaluate a particular charity. However, the head often struggles with the heart and we end up feeling conflicted, deciding between “good” or “bad” investments.

Here a few simple steps to balance passion and reason, reduce any stress, and bring more joy to your holiday season:

1. Sometimes having your “heart-strings” tugged isn’t a bad thing. For all of the solicitations that you receive that you can leave in the mail pile, which are the ones on the top of the stack, and why?

2. Do more than give money. Volunteering with children, grandchildren or friends and neighbors can be rewarding and make your monetary resources go further.

3. Make charitable giving a collaborative effort. Year-end charitable gifts in honor of a person such as a parent, teacher or coach, or a milestone event, are a great way to connect your personal passions with your role in the broader community.

4. Finally, do your homework. Use those online tools to your benefit, but don’t let them weigh you down. One of the greatest gifts you can offer is to give with your heart, and follow through with your head.

Charitable giving gets a lot of attention this time of year. Whether you’re helping Santa bring a present to a needy child, donating to the local food pantry or contributing to a global charity, a balanced approach to philanthropy can add to your holiday spirit.

Gioia Perugini

gperugini@hembar.com

We have found that the family business context is particularly rife with potential for disputes.  Whether the issue is employment of family members, compensation, sale of the business or business succession, the often combustible combination of business pressures, strict legal duties and family dynamics can create significant conflicts.  It is important for all family members involved in a closely held business to act cautiously, ever mindful of the duty imposed by law to not act out of “avarice, expediency or self-interest.”  In particular situations, timely intervention by a trusted advisor can cut off potential conflict before a dispute erupts.

Joseph L. Bierwirth

jbierwirth@hembar.com

http://www.visualwebcaster.com/IRS/76865/event.html

Marcia M. Governale
mgovernale@hembar.com