3157817100 Josephbaldwin farmcrediteastcom TAX ISSUES WITH SUCCESSION PLANNING OPPORTUNITIES WHICH ENTITY TYPE IS THE BEST FOR SUCCESSION PLANNING WHICH ENTITY TYPE IS THE BEST ID: 628431
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Joe Baldwin, EAFarm Credit East315-781-7100Joseph.baldwin@farmcrediteast.com
TAX ISSUES WITHSUCCESSION PLANNING
OPPORTUNITIESSlide2
WHICH ENTITY TYPE IS THE BEST FOR SUCCESSION PLANNING?
?Slide3
WHICH ENTITY TYPE IS THE BEST FOR SUCCESSION PLANNING?
S CORPS
FOR LIFE!!!
NO WAY!
LLCS
ALL DAY!
WHATEVER
JEFF FETTER
TELLS ME!Slide4
WHICH ENTITY TYPE IS THE BEST FOR SUCCESSION PLANNING?
S CORPS
FOR LIFE!!!
NO WAY!
LLCS
ALL DAY!
WHATEVER
JEFF FETTER
TELLS ME!Slide5
WHICH ENTITY TYPE IS THE BEST FOR SUCCESSION PLANNING?
LLCs
Disclaimer: Depends on Facts and Circumstances, but generally speaking LLCs are preferredSlide6
A
wants to transfer 50% of his business to B
A
BSlide7
A
wants to transfer 50% of his business to B
A
B
SELL IT
GIFT IT
EARN ITSlide8
A
wants to transfer 50% of his business to B
A
B
SELL IT
A now has a large taxable gain!!
B can’t cash flow the purchase
B can’t get the financing
Limited Flexibility with Timing
Depreciation Recapture IssuesSlide9
A
wants to transfer 50% of his business to B
A
B
SELL IT
A now has a large taxable gain!!
B can’t cash flow the purchase
B can’t get the financing
Limited Flexibility with Timing
Depreciation Recapture IssuesSlide10
A
wants to transfer 50% of his business to B
A
B
A worked hard for this equity!!....
A might use up gift/estate exemptions
A
nnual exclusion gifts take forever!!!
B might not be ready
B’s siblings now resent B!!
GIFT ITSlide11
A
wants to transfer 50% of his business to B
A
B
A worked hard for this equity!!....
A might use up gift/estate exemptions
A
nnual exclusion gifts take forever!!!
B might not be ready
B’s siblings now resent B!!
GIFT ITSlide12
A
wants to transfer 50% of his business to B
A
B
A recognizes no gain from sale
A preserves gift/estate exemptions
B is incentivized, both A & B benefit
B builds equity while deferring tax
Timing of transition easily controlled
EARN ITSlide13
LET’S GIVE “B”
A PROFITS INTERESTSlide14
CAPITAL INTEREST
PROFITS INTEREST
UNDERSTANDING
INTERESTSSlide15
CAPITAL INTEREST
ENTITLES RECIPIENT TO A SHARE OF LIQUIDATION PROCEEDS
PROFITS INTEREST
ENTITLES RECIPIENT TO A SHARE OF FUTURE PROFITS AND APPRECIATION
UNDERSTANDING
INTERESTSSlide16
A
B
NET WORTH =
$800,000
NET WORTH =
$0
STARTING POINTSlide17
A
B
NET WORTH =
$400,000
NET WORTH =
$400,000
OBJECTIVE IS REALLY TO GIVE B 50%
CAPITAL INTEREST
Slide18
A
B
NET WORTH =
$400,000
NET WORTH =
$400,000
OBJECTIVE IS REALLY TO GIVE B 50%
CAPITAL INTEREST
BUT
WE
CAN’TSlide19
CAPITAL INTEREST
ENTITLES RECIPIENT TO A SHARE OF LIQUIDATION PROCEEDS
PROFITS INTEREST
ENTITLES RECIPIENT TO A SHARE OF FUTURE PROFITS AND APPRECIATION
UNDERSTANDING
INTERESTSSlide20
CAPITAL INTEREST
ENTITLES RECIPIENT TO A SHARE OF LIQUIDATION PROCEEDSTRANSFER OF CAPITAL INTEREST IS EITHER A GIFT
OR TAXABLE TO RECIPIENT
PROFITS INTERESTENTITLES RECIPIENT TO A SHARE OF FUTURE PROFITS
AND
APPRECIATION
TRANSFER OF PROFITS INTERESTS CAN BE
TAX
FREE
TO BOTH PARTIES
UNDERSTANDING
INTERESTSSlide21
1.) SUBSTANTIALLY CERTAIN AND PREDICTABLE STREAM OF INCOME
OR2.) PARTNER DISPOSES OF INTEREST WITHIN
TWO YEARS OF RECEIPTTax free unlessSlide22
Let’s see how it works…Slide23
A
B
NET WORTH =
$800,000
NET WORTH =
$0
50%
PROFITS INTEREST Slide24
A
B
NET WORTH =
$800,000
NET WORTH =
$0
50%
PROFITS INTEREST
ASSUME
$100,000 Profits and
$100,000 AppreciationSlide25
A
B
NET WORTH =
$900,000
NET WORTH =
$100,000
YEAR
1Slide26
A
B
NET WORTH =
$1,000,000
NET WORTH =
$200,000
YEAR
2
(By the way, only paid tax on $100,000)Slide27
BSlide28
A
I wonder what would
h
appen if I let B have
75%
of the profits?Slide29
BSlide30
BEG.EQUITY IN LLC
CAPITALCONTRIBUTED
DRAWS
BOOK INCOME
BOOK LOSSES
APPRECIATION
DEPRECIATION
END.
EQUITY IN LLCSlide31
BEG.EQUITY IN LLC
CAPITALCONTRIBUTED
DRAWS
BOOK INCOME
BOOK LOSSES
APPRECIATION
DEPRECIATION
END.
EQUITY IN LLC
OPPORTUNITIES –
FACTORS WE CAN “CONTROL”
1
2
3
Which of the
three
can we “control”?Slide32
EQUITY IN LLC
CAPITALCONTRIBUTED
DRAWS
TAX PROFITS
TAX LOSSES
APPRECIATION
DEPRECIATION
EQUITY IN LLC
ACCELERATE DRAWS/ GPS
PROFITS
INTEREST
OPPORTUNITIES –
FACTORS WE CAN “CONTROL”
PROFITS
INTEREST
2
1
3
I would argue
all three
!!!Slide33
EQUITY IN LLC
CAPITALCONTRIBUTED
DRAWS
TAX PROFITS
TAX LOSSES
APPRECIATION
DEPRECIATION
EQUITY IN LLC
ACCELERATE DRAWS/ GPS
PROFITS
INTEREST
OPPORTUNITIES –
FACTORS WE CAN “CONTROL”
PROFITS
INTEREST
2
1
3
I would argue
all three
!!!Slide34
BEG.EQUITY IN LLC
CAPITALCONTRIBUTED
TAX PROFITS
APPRECIATION
END.
EQUITY IN LLC
Three ways to build equity in LLC.
Which is the
best
?Slide35
BEG.EQUITY IN LLC
CAPITALCONTRIBUTED
TAX PROFITS
APPRECIATION
END
EQUITY IN LLC
Already paid tax on these!!!
Ticking
time bomb!?!Slide36
EQUITY IN LLC$8 Million
CAPITAL
CONTRIBUTED
TAX PROFITSAPPRECIATION
EQUITY IN LLC
$8 Million
Solution: “Diversify”… Gain Equity by all three methods?Slide37
OTHER CONSIDERATIONSDepreciation during down cycles… plan backfires?
Power of the Guaranteed Payment
Family Partnership Rules, and other ambiguitiesBuilt In Gains on ContributionSlide38
BSlide39
Power of the guaranteed payment
BEG.EQUITY IN LLC
CAPITALCONTRIBUTED
DRAWS
BOOK INCOME
BOOK LOSSES
APPRECIATION
DEPRECIATION
END.
EQUITY IN LLC
A should take a
D
raw
B should take a
GP
In the real world…
Both A and B need cash from the businessSlide40
SummaryHere’s the top 4 slides in case you zoned out…Slide41
CAPITAL INTEREST
ENTITLES RECIPIENT TO A SHARE OF LIQUIDATION PROCEEDSTRANSFER OF CAPITAL INTEREST IS EITHER A GIFT
OR TAXABLE TO RECIPIENT
PROFITS INTERESTENTITLES RECIPIENT TO A SHARE OF FUTURE PROFITS
AND
APPRECIATION
TRANSFER OF PROFITS INTERESTS CAN BE
TAX
FREE
TO BOTH PARTIES
UNDERSTANDING
INTERESTSSlide42
1.) SUBSTANTIALLY CERTAIN AND PREDICTABLE STREAM OF INCOME
OR2.) PARTNER DISPOSES OF INTEREST WITHIN
TWO YEARS OF RECEIPTTax free unlessSlide43
BEG.EQUITY IN LLC
CAPITALCONTRIBUTED
DRAWS
BOOK INCOME
BOOK LOSSES
APPRECIATION
DEPRECIATION
END.
EQUITY IN LLCSlide44
OTHER CONSIDERATIONSDepreciation/losses during down cycles… plan backfires?
Power of the Guaranteed Payment
Family Partnership Rules, and other ambiguitiesBuilt In Gains on ContributionSlide45
Thank you