|
|
________________________________________________ ESOPs If you own a business, establishing an employee stock ownership
plan (ESOP) may provide you with a number of estate planning opportunities.
An ESOP is similar to a traditional defined contribution plan in
which an employer makes contributions to accounts established for
employees. But, rather than investing in a variety of assets, an
ESOP invests primarily in the stock of the company involved. Selling a portion of your stock to an ESOP can provide you with
liquidity. You can defer gain on the sale through the purchase of
qualified replacement property (QRP), such as certain stocks and
bonds in operating companies that meet prescribed rules (and which
do not need to be publicly traded). In addition, your family members
can retain control of the company by controlling the ESOP and fulfilling
buy-back requirements when an employee leaves or dies. Planning
Options After establishing an ESOP, you may hold cash, QRP or a promissory
note from the company in place of the stock sold to the ESOP. Let's
look at some of the estate planning strategies available for the
proceeds of the sale to the ESOP. Holding the assets. The estate planning possibilities for
QRP are similar to those for other low-basis assets. However, disposition
of QRP will trigger the recognition of gain in some instances, such
as a transfer to a family limited partnership (FLP) or a limited
liability company, where gain would ordinarily not be recognized.
As with other appreciated property, the simplest plan is to hold
the QRP until death, at which time your estate will receive a stepped-up
basis. While this strategy may eliminate capital gain, it may be
less effective than other options at minimizing transfer taxes.
Gifting the assets. While disposing of QRP generally results
in taxable gain, gifting QRP does not. You may make gifts of QRP
to charities, charitable trusts or noncharitable beneficiaries,
either outright or in trust. You can receive an income tax deduction
(which is limited in some situations) for the gift without incurring
offsetting capital gain on the disposition of the QRP. Rather than making an outright gift to charity, you may wish to
use the ESOP stock sale assets to establish a charitable remainder
unitrust. You could receive cash flow and a current income tax deduction
for the remainder interest value that passes to charity after the
end of term. If you receive a promissory note from the ESOP as part of the stock
sale price, the note may be an appropriate asset for gifting. You
may be able to discount the value of the note due to the risk that
the note will not be timely paid. The note also may be a good candidate
for an outright gift to charity or for funding a charitable lead
annuity trust. This type of trust pays an annuity to a charity for
a period of time and then pays the remainder to a noncharitable
beneficiary. Establishing a grantor trust. You may use QRP or other assets
of the stock sale to establish a grantor retained annuity trust
(GRAT) for the benefit of your children. At a low gift tax cost,
you can retain all or most of the cash flow while removing the property
from your estate and saving estate tax. GRATs are most effective
when funded with income-producing property that you expect to appreciate
significantly in a short period of time. Purchasing bonds. In some instances you may have decided
to purchase qualifying long-term bonds as QRP. Such bonds pay a
"floating" interest rate and are well suited as security
for loans. You can use the proceeds of loans made against such bonds
to make other investments. You can also establish an FLP with the
loan proceeds (which would otherwise trigger recapture of the QRP
gain) to implement a gifting program. Buying other assets. An alternative to buying QRP with the
proceeds from the initial sale of company stock is to pay the 20%
capital gain tax and use the remaining cash to purchase assets to
fund an FLP. You then give shares in the partnership to the limited
partners (usually your children) to take advantage of the valuation
discount for minority interests and for lack of marketability. If you purchase real estate, you may want to consider buying a
vacation home and establishing a qualified personal residence trust.
The trust beneficiaries receive a gift of a remainder interest in
the property, which is discounted for your right to live in the
home. Choosing
a Strategy Establishing an ESOP gives you estate planning options that can
result insubstantial tax savings. Ideally, you should consider your
options before you establish an ESOP, so the type of asset you acquire
with the sale proceeds lets you use the most beneficial strategies.
If you have recently established an ESOP, or are considering one,
we can advise you about various strategies for maximizing the benefits
to your estate from the assets you receive from the ESOP transaction. Adjustments
for 1999 Many of the exemption and exclusion amounts used for estate and
gift planning change over time, whether because of changes in the
cost of living or changes in tax laws. The following will help you
keep current for 1999. Lifetime gift and estate tax exclusion amount $650,000 Some of these changes may affect your existing estate plan. To
be sure you are taking advantage of the increasing amounts, review
your estate plan regularly. We can help you make any necessary adjustments
to ensure that your estate plan also keeps up with the changes.
|
|
©
Copyright 2001 Fahlman & Olson. All rights reserved.
LEGAL NOTICE
|