Estate Planning Advisor Keeping the Family Business in the Family - PDF document

miller nash llp | Spring 2014 brought to you by the trusts & estates practice team Estate Planning Advisor Keeping the Family Business in the Family What if There Is More Than One • Promissory Note or Preferred Child? If more than one child could Interest. A very popular approach is potentially be involved in the family to transfer to the No-Control Child a by Ronald A. Shellan business, another hardheaded analysis preferred interest in the company. So ronald.shellan@millernash.com has to be made as to whether the busi- if the company was worth $10 million, 503.205.2541 ness should pass to one or more chil- the No-Control Child could be given a dren. Although there are exceptions, note from the business for $5 million, Most family businesses do not sur- siblings often have difficulties working leaving the Control Child with a busi- vive ownership by the next generation. together as equals in managing a ness with a net value of $5 million. When the members of the founding family business. We have seen many Alternatively, the No-Control Child can generation are ready to retire, they can, siblings fighting with one another to be transferred a preferred interest in of course, sell the family business to work out issues relating to managing the company, such as $5 million in pre- an outside buyer or an employee. They a family business—almost always to ferred stock that pays a fixed dividend. can also liquidate it. But many owners the detriment of the business and their dream of passing on the business to the Gift the Family Business During own interests. next generation. What are the best ways Life or at Death? Should the family to accomplish this? What issues must Treating the No-Control Child business be transferred by gift or sale be overcome? Fairly. Even though a child (the “No- during life or at death? If at death, the Control Child”) is not given control of Do the Children Have the “Right (continued on page 6) the business while another child (the Stuff”? An initial issue that must be “Control Child”) is given control, the very carefully considered is whether No-Control Child can receive his or her the next generation has what it takes inside this issue proportionate share of the founder’s to carry on the family business and 2 Personal-Property Dona- estate. A few of the more popular solu- whether it makes sense to do so. A tions: Achieving the Tax tions that should be considered are set hardheaded analysis needs to be made Deduction You Expect forth below (all examples assume two to determine whether at least one of the 3 An Essential Business children): founder’s children has the work ethics Agreement: The Buy-Sell and business smarts to make the busi- • Nonvoting Interest. Transfer a 50 4 Keeping Separate Property ness prosper. The same analysis needs percent nonvoting business to the No- Separate: Trusts for Benefi- to be made as to whether the business ciaries Control Child and a 50 percent voting should be kept at all. If the business interest to the Control Child. specializes in products or services that • Other Equally Valued Assets. An- are becoming obsolete in the market- other approach is to give the No-Control place, it might not make sense to invest Child other assets equal to the value of the time and energy to transfer it to the the family business. Life insurance can next generation. be used to fund such a gift. www.millernash.com

Personal-Property Donations: Achieving the Tax Deduction You Expect 2. The Appraisal Requirement: 4. Your Own Creations: The If you donate artwork and claim a total Internal Revenue Code limits your deduction exceeding $20,000, you are deduction for donations of works of art by Jack B. Schwartz required to attach a qualified appraisal or similar property created by you to the jack.schwartz@millernash.com to your return. You may request an cost of materials used in the project. 503.205.2560 IRS statement of value for donations 5. Business-Inventory Donations: of artwork claimed to exceed $50,000 Thinking of donating the bottle of Deductions for businesses donating in value (the IRS will require a $2,500 Chateau Lafite that’s been aging in your items of inventory to a charity are gen- user fee). Works valued at this level are cellar to your favorite charity’s next auc- erally limited to the lesser of fair market automatically reviewed by the IRS Art tion? Or, better yet, the dust-catching value or the cost of the goods donated. Advisory panel. You may request an sculpture inherited from your grand- To ensure against double deductions, IRS statement of value for these. mother? Navigating the minefield of a business must remove the donated personal-property-donation items and the related costs deductions can be tricky, but from its opening inventory success is likely if technical for the year of the donation. requirements are taken into There are two special excep- account. Here are a few of tions to the deductibility the IRS rules governing the limit for business-inventory income tax deductibility of donations by C corpora- certain personal-property tions: First, when donating donations: inventory for the care of the ill, the needy, or infants, a 1. The Related-Use corporation can deduct the Rule: Income tax deductions lesser of its cost basis plus for donations of artwork, col- 50 percent of the difference lectibles, wine collections, between the cost basis and watercraft, and similar the list price or 200 percent tangible personal property of the cost basis. Second, are limited to your cost basis “If you donate artwork and claim a total deduction this expanded limitation unless the donated personal exceeding $20,000, you are required to attach a qualified also applies to donations property is related to the appraisal to your return.” of “qualified research charity’s tax-exempt purpos- property” to institutions of es. If so related, a deduction 3. The Three-Year Reporting higher learning or scientific research can be claimed equal to the fair market Requirement: A charity that sells or bodies that certify that the property will value of the donation. Thus, deductions otherwise disposes of donated personal be used for research purposes. for donations of property to charity auc- property within three years of the dona- tions will always be limited to your cost 6. Donations to Goodwill, tion is required to file an information basis. On the other hand, your donation Etc.: Donations of used clothing or return with the IRS. A discrepancy of the sculpture to a museum that uses household items in good condition to between the amount that the charity re- it for display or educational purposes Goodwill Industries or rummage sales ports it received and the value that you will be deductible at fair market value. are valued at less than your cost in most may have claimed earlier as a deduction But if the sculpture is valued at $5,000 cases, so their present value is fully could cause the IRS to question the or more and the museum disposes of deductible. amount you deducted. it within the year of the donation, your deduction will be limited to your tax basis (in most cases, the value of the sculpture at your grandmother’s date of death). 2 | miller nash llp | Estate Planning Advisor