GETTING THE BUSINESS PREPARED FOR TRANSITION:

ESTATE AND TAX CONSIDERATIONS

Anthony J. Madonia, Founder

233 S. Wacker Drive, Suite 6825Chicago, IL 60606-1609

312-578-9300

ANTHONY J. MADONIA Founder and President, Anthony J. Madonia & Associates,

Ltd. Bachelor of Arts in Accounting from University of Illinois Juris Doctorate from John Marshall Law School Certified Public Accountant

Practice focus Estate Planning and Administration Business Planning Corporate Law Taxation

Member American Bar Association American Association of Attorney-CPAs The Justinian Society of Lawyers

Past Chair Asset Protection Committee of the Chicago Bar Association

TAXES GENERALLY DUE UPON SALE

Capital Gains Excess of the amount realized over the adjusted

cost basis

Recapture of Certain Depreciation Taxed as ordinary income

State and Local Taxes May Involve Capital Gains, Sales, Use Taxes May Involve Multiple States

CONSEQUENCES OF TYPICAL BUSINESS SALE

Liquidity

Higher tax bracket

Ability to Directly Manage the Business

Income from After-tax Proceeds May Be Less

ESTATE AND TAX SOLUTIONS

Transfer of business interests to family members

Outright gifts Irrevocable trusts for the benefit of children Family limited partnerships

Irrevocable Life Insurance Trusts

Grantor Retained Annuity Trusts

Charitable Remainder Trusts

Buy-Sell Agreements

Equity Stripping

TRANSFERS OF BUSINESS INTERESTS

TO FAMILY MEMBERS

Move Interests From Selling Entity When Values Are Low

Future Generations Receive Benefits of Sale Proceeds When Sales is Complete

Asset Outside of Taxable Estate

EARLY ESTATE PLANNING REQUIRED

GIFTS TO FAMILY MEMBERS

Lifetime gift tax exclusion $5.34MM – Individual $10.68MM - Married Couple

Annual Cash/Assets Exclusion $14,000 – Individual $28,000 – Married Couple

Annual Gift Tax Free Gifts

GIFTS TO FAMILY MEMBERS

Benefits Removes assets and resulting capital gains from

your estate Allows you to pass shares or business interest to

future generations

Considerations No certainty to future exclusion or tax rate Outright gifts do not come with any asset protection Loss of control over shares or other gifted assets Future generations are responsible for capital gains Cost basis carries over to next generation

LARGER TRANSFERS

Gifting More Than Annual or Lifetime Exclusion

There are methods available to compress the value of shares that are sold or giftedFractionalized ownershipRestrictions on transfer and management

STRUCTURAL CHANGES TO CONSIDER

Large Gifts of Shares May Fit Within Lifetime Gift Exemption

Valuing Closely Held Entities Market method Income method Net asset value method

IRREVOCABLE TRUST

Benefits Your Children/Heirs

Shares are Not Included in Business Owner’s Estate

Children Can Take Advantage of Appreciation of Shares Without Gift or Estate Tax

Option for Tax Flow-Through Grantor Trust Trustmaker either gifts or sells assets to the trustAssets Can Be: C-Corp, S-Corp, Partnership or LLC

IRREVOCABLE TRUST

Benefits Trustmaker’s Estate Reduced for Estate Tax

Purposes Value of Property in Trustmaker’s Estate Frozen All Appreciation Passes to Trust Beneficiaries

Without Gift or Estate Tax Trustmaker Pays Taxes on Trust Income Resulting in

Faster Growth of Beneficiaries’ Share of Trust Assets Transactions Between Trustmaker and Trust Have

No Income Tax Consequences; Thus no gain/loss recognized on sale

Trustmaker Can Retain Management Duties Over Business

FAMILY LIMITED PARTNERSHIP

All or Most of Partners are Family Members

How it works General Partner Contributes Business Interests to the Partnership

in Exchange for Limited Partnership Interests General Partner Gives All or Portion of Interests to Their Children General Partner Retains Management and Control Over Assets

Provides Protection of Family Assets Upon Divorce Interest Likely Characterized As Non-Marital Property, Not Subject

to Equitable Division

Partnership Agreement May Provide Involuntary Transfer (i.e. Divorce Court Award) is Subject to Buy/Sell Agreement Provisions Requiring Purchase by Divorced Partner

FAMILY LIMITED PARTNERSHIP

Overall Benefits Achieves a Variety of Business, Estate, Tax Objectives Provides Centralized Management of Family Assets Avoids Family Disputes Allowing Smooth Transition of

Power Upon Death of Senior Generation Simplifies Gifting Especially Real Estate and Intellectual

Property

Tax Benefits Reduces the Taxable Estate of the General Partner Limited Partners Have No Right To Control Limitations on Transfer Receives Pass-Thru Entity Treatment for Federal Income

Taxes May Be Terminated Without Adverse Income Tax

Consequences

FAMILY LIMITED PARTNERSHIP

Estate Benefits Decedent’s Estate or Trust Will Hold Partnership

Interest vs. Assets, Greater Degree of Confidentiality

Asset Protection Benefits Creditors May Not Force Distributions Creditor Attached to a Partner’s interest, Does Not

Become a Partner, Cannot Vote or Cause Dissolution of the Partnership; They Merely Become an AssigneeAssignee’s only right is to receive distributionsAssignee is taxed on its share of the partnership’s

income, making it pay tax on income it cannot reach.

IRREVOCABLE LIFE INSURANCE TRUST (ILIT)

Option for Business Owners with a High Net Worth Due to Estate Tax Exposure in Buy/Sell Agreements

How It Works ILIT trustee and Other Business Owners Enter Buy-Sell Agreement

Owner’s ILIT Purchases Life Insurance Policies on Other Owners

Owner Provides Funds for the ILIT Trustee to Pay Premiums by Making Gifts/Loans to ILIT

Shareholder Agreement Provides for Buyout by ILIT

Upon Owner’s Death, ILIT Trustee Receives Proceeds; Uses Them to Purchase ILIT’s shares of Deceased Owner’s Interest

IRREVOCABLE LIFE INSURANCE TRUST

Benefits Business Interest Purchased by the ILIT is Not

Included in Owner’s Taxable Estate

Provisions of ILIT Can be Drafted to Accomplish Owner’s Objectives

Upon owner’s death, ILIT Can Become Owner of His Share of Business, Leading to Centralized Management of Business Interest for Beneficiaries

GRANTOR RETAINED ANNUITY TRUST (GRAT)

Irrevocable Trust Where Grantor Retains Right to Receive a Fixed Annual Amount From Trust For Fixed Period After Initial

Contribution

After Fixed Period GRAT Terminates Remaining Assets Are Either Continued in

Further Trust or Distributed Outright to Beneficiaries

Initial Contribution of Property is Subject to Gift Tax

Any Appreciation of the Property is not subject to addt’l gift taxes

GRANTOR RETAINED ANNUITY TRUST (GRAT)

Benefits Owner Keeps All or Most of the Business

Income Owner Retain Management Control Before

Passing It to Beneficiaries Keeps Transfer of Ownership from Becoming

Public Asset Protection for Current and Future

Generations

CHARITABLE REMAINDER TRUST (CRT)

Irrevocable Trust with Income Paid to Trust Beneficiaries for a Term or Life with Remaining

Assets Going to Charity

How It Works Business Owner Contributes Ownership Interests to CRT

CRT Sells Interest to a Third-party Buyer

CRT Does Not Incur Capital Gains Tax on the Sale Transaction

CRT Uses Cash Left to Make Annuity Payments to Owner and Spouse for Life

Upon Death of the Owner and Spouse, CRT Terminates and Remaining Balance is Paid to Designated Charities

CHARITABLE REMAINDER TRUST (CRT)

Benefits Owner Receives Charitable Deduction Upon Transfer of

Assets to CRT When CRT Sells Stock or Other Business Interests, No

Capital Gains Tax is Paid (More Money for Trust Beneficiary Payout)

CRT Itself is a Tax-Exempt Entity; Not subject to tax Beneficiaries Pay Tax on Income Distributions from CRT Interest in CRT is Not Included in Owner’s Estate

Possible Downside Assets are Ultimately Passed to Charity, Not to Future

Generations; However, Tax Savings and Increased Cash Flow Can Be Used to Purchase Insurance for ILIT for heirs

OTHER CHARITABLE GIVING OPTIONS

Charitable Gift Annuities Gift of Cash or Other Assets to Charity in Return for

Amount of Income for Life

Charitable Lead Trusts Provides Income Stream for Charity for Set Period of

Time, Then Transfers Trust Assets to Named Beneficiaries

Donor Advised Funds

Private Charitable Foundations

BUY-SELL AGREEMENTS

Contracts Between Business Owners or Between Business Owners and Their Business

These Contracts Become Part of Corporate Bylaws, Shareholder Agreement, Partnership Agreement or LLC Operating Agreement

Can Be Updated Periodically as Needs and Assets of Business Change

BUY-SELL AGREEMENTS

Why Have a Buy-Sell Agreement?If a Business Owner Dies Without a Buy-Sell

Agreement or Some Other Arrangement for His Shares in a Business, Those Shares Will Pass to

Beneficiaries As Indicated in Will, Trust or State Law

Possible Disputes and Disruptions Heirs May Wish to Sell Their Shares to Company

but Company Does Not Offer a Fair Price Heirs May Wish to Sell Shares to Outsiders, Who

May Not Be Compatible with Other Owners Heirs May Decide to Retain Shares, but Lack

Expertise Needed to be Involved in Business

BUY-SELL AGREEMENTS

Value of Buy-Sell Agreements Prevent Disputes and Disruptions Good Succession-Planning Tools For Share

Valuation Valuable Estate Planning Tools for Shareholders

The Basics Restrictions on Share Transfers Pricing Mechanism Method for Funding the Buyout

ADDITIONAL ASSET PROTECTION CONSIDERATIONS

Equity StrippingConsideration for Valuable Assets (i.e. Inventory,

Equipment, Patents, Trademarks, Accounts Receivable) Protect By Stripping Assets of Their Equity

Borrow Against Asset; Give Another Party a Lien for the Debt

Create LLC to Reduce Chance of All owners Being Debtors of Common Creditor

Lease-back Arrangements

Benefit Control and Enjoyment of Asset; Less Tempting for

Creditors

Caveat Fraudulent Transfers Tax considerations

Questions?

Anthony J. Madonia, FounderAnthony J. Madonia & Associates, Ltd.

233 S. Wacker Drive, Suite 6825Chicago, IL 60606-1609

312-578-9300