Estate planning for business owners involves a consideration of non-tax objectives along with the goal of limiting the size of the taxable estate. Non-tax objectives such as property transfer, and when transfer should occur, will have to be addressed in the early phases of developing a succession plan. Divorce and second marriages can complicate succession planning and present special estate planning challenges.

Further complicating the non-tax issues is the matter of equal distribution to heirs. Does $50,000 "worth" of stock in a closely-held corporation equate to $50,000 in cash? The value of the stock is based on its value as a "going concern"; without the effort required to keep the business going, it may really have very little value. A succession plan may not be implemented because there is no apparent solution. The business is simply left to the heirs collectively with the hope that they can come to an equitable solution. This may be unrealistic in light of the circumstances.

Your Business is an Asset
An owner's interest in the business is an asset included in their estate for estate tax purposes. The value assigned to ownership interests can drastically impact the tax eventually paid by the estate. It is possible under specific conditions, to fix the value of the owner's business interests for estate tax purposes. Case law permits a buy-sell agreement to fix the value of a business for federal estate tax purposes if:

• The agreement is binding both during lifetime and at death.

• The arrangement does not seek to pass the business interest to heirs for less than adequate and full consideration.

• The agreement is a bona fide business arrangement.

Section 2703 of the IRS Tax Code further stipulates that the terms of the arrangement must be comparable to other agreements made at arm's length. If this condition is not met, taxpayers cannot rely on the value fixed in a buy-sell agreement if such agreement is made, or substantially modified after October 8, 1990. The problem created by this provision is the determination of just what a "comparable arrangement" might be. To this date, both Congress and the courts have provided few general guidelines. Significant ambiguity and a large degree of uncertainty still exists. What is clear is that agreements made prior to the effective date are "grandfathered" unless "substantially modified", and extreme care must be taken when changing prior agreements.

Family Limited Partnership (FLP)
Among the vast array of estate planning techniques available, the use of a family limited partnership merits special consideration. It is an attractive vehicle for both managing a family business and for protecting an owner's wealth.

Asset Protection Tool
An FLP is designed to take advantage of Section 703 of the Revised Uniform Limited Partnership Act. This act provides that a creditor's interest against a partner is limited to distributions made from the partnership, and not to the partnership interest itself. Since the general partner (who is controlled by a family member) determines the timing and amount of distributions, the creditor's ability to gain satisfaction under a judgement can effectively be blocked. The ultimate deterrent for a "judgement creditor" is that, by obtaining a judgement against a partner, the creditor is treated as being the owner of a portion of a partnership interest. The creditor must pay income tax on his "share" of the partnership income as determined by the judgement, even though he does not receive an income distribution.

Wealth Transfer Tool
For managing the family's enterprises, the FLP maintains control through the general partner. The business owner can give away partnership interests reducing the size of his estate for estate tax purposes while retaining control of the operations of the business.

The FLP can be used to manage the assets of a family that include one or more business interests. An FLP is one of the ways to allow for the transfer of interests small enough to qualify for the annual gift tax exclusion (available on annual gifts up to $12,000 or $24,000 in 2007 if both spouses make gifts, or if an election to split the gift is made).

Partnership interests gifted may receive a minority discount. The minority interest discount concept is based on the notion that when an ownership interest lacks voting control, that interest is worth less than its pro-rated share of the underlying asset. The IRS recently conceded that minority discounts will still be allowed, even if the aggregated interests held by family members constitute a controlling interest. This means that a business owner can get a minority discount (lower valuation when gifting minority portions) and a minority discount for owning a minority interest in his taxable estate. This favorable tax treatment can provide significant leverage in transferred assets for estate tax purposes.