What's going to happen to your family business after you die? Business owners must plan for succession or transition for when that time comes, and should be included in your estate and succession plans. Today, attorney Mark Kellogg shared his insight with the Greater Lansing Estate Planning Council, at a meeting on estate and succession planning for family and closely-held businesses. His presentation included a look at: • Different Types of Business Entities • Joint Ownership of Personal Property • Gift and Estate Tax Exclusion • Key Components to Consider for Succession Planning • Estate Planning Considerations • Family Limited Liability Companies

1. ESTATE PLANNING AND
SUCCESSION PLANNING FOR
FAMILY AND CLOSELY HELD
BUSINESSES
MARKE. KELLOGG, J.D., CPA
SHAREHOLDER, FRASERTREBILCOCKDAVIS &
DUNLAP, P.C.
THESE MATERIALS ARE NOT INTENDEDAS LEGAL ADVICE ANDARE FOREDUCATIONAL PURPOSES
ONLY
© 2015 Fraser Trebilcock Davis & Dunlap,
P.C.

2. FAMILY BUSINESS
CHARACTERISTICS

3. FAMILY BUSINESS
SUCCESSION…

4. Estate Planning for Family and
Closely Held Businesses
 To many, estate planning consists of deciding
how property should be distributed at death
 BUT, it also includes plans and techniques to
build your estate during life –
 type of property to own
 form of ownership; and
 organization and operations of the business
including succession planning – which may
include passing the business on to the next
generation

5. Types of Business Entities
 Corporation
 C – Corporation
Subject to Michigan Business Tax
 Subchapter S Corporation (or S-
Corporation)
Pass-through entity
Restriction on Type of Shareholders
(QSST)

6. Types of Business Entities
 Limited Liability Company
 Entity of Choice (but consider
options)
 Can also be formed as:
C-Corporation
S-Corporation
Disregarded Entity (Single Member
LLC)

7. Types of Business Entities
 Limited Liability Company
 Pass-through entity (unless C-
Corporation)
 Consider Self-employment tax issues v.
S-Corporation; Employee v. Member /
Shareholder
 C-Corporation, S-Corporation,
Disregarded Entity (Single Member
LLC)

8. Types of Business Entities

Limited Partnership (consider
liability of General Partner)
 General Partnership (very limited
use–partners typically entities)
 Sole Proprietorship

9. Joint Ownership of Personal
Property
 Stock (MCL 557.151) and a membership
interest in a limited liability company (MCL
450.4504) may be held by a husband and wife
in joint tenancy in the same manner and
subject to the same restrictions,
consequences and conditions that apply to the
ownership of real estate held jointly by a
husband and wife under Michigan law
(tenancy by the entireties) – including with full
right of survivorship.

10. Gift and Estate Tax Exclusion
(Exemption) Amount and
Portability

$5,430,000 for 2015 (indexed
annually for inflation)
 Portability
 Helps small businesses in gift
and estate tax planning

11. ESTATE/SUCCESSION
PLANNING
--WHERE DO YOU START?
Do you want
to transfer
your business
as a
“business” or
simply as a
group of

12. 
 If as a business:
You will need both a business
transition (succession) plan and
an estate plan
 If assets:
You will only need an estate plan
WHERE DO YOU START?

13. What’s the Difference?

14. GOALS: Things to Consider
 Retirement lifestyle
(money needed)
 Non-business heirs
 Residence
 Lifestyle (money
needed)
 Growth of Business
 Attitude toward debt
 Ownership vs.
renting
 Family time vs. work
OLDERGENERATION
YOUNGER
GENERATION

15. Things to Consider: Financial
Viability
 Business Income
 Amount
 Source
 Business Debt Structure
 Long-term v. short-term
loans
 Principal
payments/Interest Rate
 Source
 Family Living Cost
 Retiring Family
 Business Family (younger
generation)
 Insurance

16. Planning for the future: Succession
Plan
 Are parents (business owner) ready for a
partner?
 How committed is the child to the business?
 Is the business large enough?
 Do you have a common vision of your future
together?
 Can you live and work together?
 How many children in the business?
 Roles of children if more than one?
 Are the non-business children supportive?

17. Components to
Transfer

18. Methods to Consider:
Gift
 Possible Gift Tax Implications
 Annual/Serial Gifting (2015 Annual Exclusion
$14,000)
 Gift Planning
Sales
Consider financing options
Succession Planning:
Ownership

19. Family Limited Liability
Company
 In the context of estate planning for a family, an
LLC is a company owned among family members
created to allow joint ownership of family/business
owned assets (such as real estate, business
assets, equipment, stock (not S-corporation
stock)).
 Benefits to implementing an LLC as part of estate
plan:
 To “fractionalize” interests in property for the purpose
of carrying out a gifting strategy
 To seek “discounts” on life-time gifts made and on the
transfer of a member’s remaining interest in the LLC
at death (discounts for lack of control and lack of
marketability may total up to 30% to 40%).

20. Methods to Consider (cont.):
Timeline
 Specifically outlined and followed
 Gradual change in ownership
Inheritance / Will
Consider non-business children (heirs)
 Sufficient non-business assets/insurance
Succession Planning:
Ownership

21. Succession Planning:
Management
 How will management be divided?
 Enterprise
 Whole business
 Business Responsibilities/Roles/Activities
 Timeline for management transition
 Training/Learning or Testing Phase
 Completion/phase-out date
 Parent/child relationship vs. business
partner

22. Succession Planning:
Income/Labor
 How will income and labor be split?
Enterprise
Shares/Ownership
Wage
Combination
 Timeline for split of income and labor
 Job description

23. Planning for the Future: Retirement
Plan
 Timeline of business involvement by family
 Considerations of management, labor, ownership
 Where will money come from?
 Considerations of income
 Where will you live?
 How will you account for non-business
children/heirs?
 Use of Insurance/sufficient non-business assets
 Will/Trust is contingency plan (coordinate
succession plan with estate plan)

24. RETIREMENT INCOME
OPTIONS
 Operating child/heir
can rent
equipment/real estate
from parents (long-
term lease)
 Purchase of Business
 Rental payments or
business purchase
proceeds can finance
retirement income
stream

25. Buy-Sell Agreement
 Buy-sell agreement is essential if gifting and/or
selling business interests to family members/key
employees
 Provides buy-out provisions and guarantees a
market for a deceased, disabled or withdrawing
stockholder’s/owner’s shares/interests
 Restricts the transfer of the business interest and
guarantees that control over the business
remains in the hands of the surviving or
remaining stockholders/owners
 Fix the value of the business for estate and gift

26. Concern forMinimizing TransferTaxes on
Transferof Business-
1. Utilize annual exclusion gifts; gift tax
exemption; and valuation discounts
2. Make gifts in trust to protect beneficiaries from
creditors, ex-spouses and estate taxes
3. If sale required for business owner’s retirement
needs, consider:
 Sale to Defective Grantor Trust
 Grantor Retained Annuity Trust (GRAT)
 Private Annuity
 Self-Cancelling Installment Note (SCIN)

27. Sale to Defective Grantor Trust
 If business owner chooses to sell the business to
younger generation with owner receiving installment
note as payment
 Sale to a Trust of which the business owner (senior
generation) is the owner for income tax purposes
 No capital gains tax
 Balance income needs of business owner with the
transfer tax consequences of the terms of Note
 For example, the balance of the note will be included
in the estate of business owner for estate tax
purposes
 Typically not appropriate for C-Corporations (because
of double taxation with dividends)
 Note should contain a self-cancelling provision

28. Sale for Private Annuity
 Sell business interests to the junior generation in exchange for a
private annuity
 The private annuity will provide for periodic payments to business
owner for life (or the shorter of life or a term of years)
 Sale for private annuity will provide source of income that can be
extended for life of business owner (unlike sale to grantor trust)
 This technique is best suited for transfer of a business that
produces significant income
 Not typically appropriate for a C-Corporation because it can result
in double taxation of corporate dividends
 From the family’s overall tax standpoint, may have adverse transfer
tax consequences if the business owner outlives his or her life
expectancy (may freeze value at time of sale)
 Might be short-lived opportunity-2006 proposed regulations would
require recognition of income at time of exchange

29. Grantor Retained Annuity Trust
(“GRAT”)
 Transfer of business interests to GRAT
 Retain the right to receive an annuity payment
back from the GRAT for each year of its term
 Difference between the present value of the
annuity payments and the initial transfer to the
GRAT is a gift for gift tax purposes (GRAT may be
“zeroed out”)
 Better suited for the transfer of business interests
if the interests generate sufficient income to
satisfy the annuity payments in cash or other
liquid assets
 Business owner may have to consider need for
alternative income sources once the GRAT
terminates and the annuity payments end

30. Self-cancelling Installment Note
(SCIN)
 Although advantage of intra-family installment
sale is that it improves the liquidity of seller’s
estate and provides income to seller of
business, a disadvantage is that the present
value of unpaid installments is included in
seller’s gross estate
 SOLUTION: Self-cancelling installment note
 Structured properly – unpaid balance not in
estate
 Hybrid of installment sale and private annuity
 Buyer must pay risk premium in exchange for
cancellation feature

31. How is succession
accomplished?
 Regular business meetings
during entire transition
period
 Talk about it, then write it
down
 Share with non-business
family members
 Surprises cause problems!
 Work with your planning
team – Attorney, CPA,
Investment Advisor,
Insurance Agent
COMMUNICATION COMMUNICATION

32. TOP TEN WAYS TO SABOTAGE
BUSINESS TRANSITION PLANS
1. Procrastinate
 Don’t write a will or transfer plan. Let
your children worry about it after you are
gone.
2. Avoid planning or making decisions
(you will be gone anyway)
3. Don’t discuss the subject of estate
planning or business succession
Keep information from the next
generation. This is a sure way to
increase family conflict.

33. TOP TEN WAYS TO SABOTAGE
TRANSITION PLANS
4. Blame others for problems.
5. Do all you can to block the younger
generation from any involvement in
goal-setting or decision making.
6. Refuse to listen to other family
members’ viewpoints.
7. Hold on to total control of the family
business.

34. TOP TEN WAYS TO SABOTAGE
TRANSITION PLANS
8. Assume others know what you want. Avoid
discussing your wishes about transfer with
family members.
9. Make sure all your sense of worth, your identity,
and life’s meaning come solely from the
business. Resist transferring to the next
generation. This way they have the least
influence and the most stress.
10. Pay no attention to wake-up calls, like a work-
related accident, illness, death, or major choice
point by a child or children (i.e., do they want to
join the “family business”).

35. KEYS TO SUCCESS FOR ESTATE
PLANNING/SUCCESSION PLANNING
1. Strengthen family relationships
2. Communicate and improve communication skills if
needed
3. Recognize individual differences
4. Management participation = learning
5. Promote and encourage decision making
6. Demonstrate a make it work attitude
7. Develop written estate and succession plans/agreements
8. Fit the agreements to the situation
9. Update the succession plan and/or estate plan as
needed
10. Work with your advisor team (attorney CPA, investment

36. MOST IMPORTANT THING TO
REMEMBER
BUSINESS OWNERS
MUST PLAN FOR
BUSINESS
SUCCESSION/TRANSIT
ION AND ESTATE
PLANNING.
IT WILL NOT JUST

37. Additional offices located in:
Detroit and Grand Rapids
Fraser Trebilcock Davis & Dunlap, P.C.
124 W. Allegan Street, Suite 1000
Lansing, Michigan 48933
www.fraserlawfirm.com
Phone: (517) 482-5800
Fax: (517) 482-0887
Mark E. Kellogg, J.D., CPA
mkellogg@fraserlawfirm.com
517-377-0890
QUESTIONS?

38. Disclaimer
These materials are not intended to be legal
advice, nor are they intended to be a substitute
for legal services from a competent professional.
These materials are for educational purposes
only.