Family Business Succession Planning – New Opportunities and Benefits Available for Family Businesses and Their Owners

Planning for the succession of ownership and operation of the family business for next generations presents many tax and non-tax challenges for the family business owner. Oftentimes, keeping the family business in the family involves having to choose between implementing strategies to accomplish tax benefits at the expense of implementing other strategies that may provide a greater likelihood the business will continue to prosper and be managed properly in the future.

Substantial yet limited opportunity
Well, as is addressed in the article below, Congress presented family business owners an unprecedented planning opportunity by enacting the legislation extending the Bush era tax cuts and expanding the estate and gift tax credits at the end of last year. While the opportunity is substantial, it’s limited and likely to undergo changes and possible repeal at the end of a short 2 year window with the current law set to expire at the end of next year, 2012.

Take advantage now
The new law and tax planning opportunities it has made available should have even more family businesses considering planning opportunities even earlier in the current generation/owners’ lifetime. As a result, even relatively young family business owners should at least be initiating discussions with their financial and legal advisers on developing a strategy to take advantage of current opportunities that may not be there a few years from now.

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Family Businesses Catch a Big Break

By Anne Tergesen
Wall Street Journal

It is the gift tax that keeps on giving.

Families now have the chance to pass a substantial stake in their businesses to the next generation—even before handing over the reins. But transferring ownership can raise complicated succession and estate-planning issues that families need to address before giving away so much as a share of stock.

To recap: As part of the tax deal passed by Congress late last year, the gift-tax exemption jumps to $5 million from $1 million for individuals and to $10 million from $2 million for couples in 2011 and 2012.

Yes, that means people can give away that much now without paying a penny in taxes.

“We have a golden opportunity to move wealth at no tax cost,” says Mark Nash, a partner in private-company services at PricewaterhouseCoopers. And those who make a gift now, tax-free, also shield future appreciation from taxes.

But the two-year window raises difficult questions for family-business owners. While those in charge don’t necessarily have to give up control, they may need to make some momentous decisions. Among them: who will eventually lead the business, how to treat other beneficiaries fairly and how to pass down wealth without jeopardizing their own retirement security.

The answers may determine which estate-planning techniques make the most sense for a family to use, says Patrick Ungashick, president of White Horse Advisors, an Atlanta financial-advisory firm that specializes in small businesses. Because decisions of this magnitude “cannot typically be made in weeks or even months,” he adds, “those who want to take advantage of the new gift-tax ceiling shouldn’t wait to start planning.”

Over the next two years, Terry Davis, 53 years old, says he plans to transfer to his two sons a portion of his stake in The Wire Shop Inc., a Fort Valley, Ga., manufacturer of wiring used in heating and air-conditioning units, among other products. Because Mr. Davis, who also is the CEO, doesn’t intend to step down for eight years, he plans to give his sons nonvoting shares. “I’d like to keep control,” he says.

By giving away some of his stock now, Mr. Davis says, he won’t have to worry that his sons could be forced to take on debt or sell the company at a “fire-sale price” to satisfy the estate-tax bill they otherwise may incur upon his death.

Yet such a move causes a new anxiety for Mr. Davis: Before his oldest son, Austin, 28, joined the company in 2006, his “exit plan was to build up the value of the business and sell it.” Now, with most of his assets tied up in the business, he says, “it’s a challenge to see how to fund my retirement.”

Mr. Davis says he recently upgraded his company’s retirement plan from a Simple Individual Retirement Account plan to a 401(k). As a result, he will receive a company match and can contribute a maximum of $22,000 this year, versus $14,000 with a Simple IRA.

He also may exercise an option to purchase the building his company rents. That way, he can lease it back to the company for an amount that will leave him with an income after covering the mortgage.

For those in Mr. Davis’s shoes, other possible solutions include establishing a profit-sharing or defined-benefit pension plan, or staying on the job as a salaried employee, consultant or paid chairman. Those who paid themselves below-market salaries during lean times may be entitled to recover “lost wages.”

Some family businesses even establish “salary continuation plans” to provide one or more key employees with a regular paycheck for a set number of years in retirement. To pass muster with the Internal Revenue Service, such programs should generally be established well ahead of an owner’s retirement and pay “reasonable” amounts, White Horse’s Mr. Ungashick says.

Another option to generate retirement income: Rather than give away shares—either outright or in a trust—you can sell them to a so-called defective trust for the benefit of children or grandchildren.

These complex arrangements come with many tax benefits. They typically involve the sale of shares in a privately held company at a discount, and a loan—plus a gift—from the business or its owner to finance the purchase. Since the trust purchases the shares at a discount, the beneficiaries can keep the excess value, plus any appreciation, estate-tax-free. And if structured properly, the business owner won’t owe any capital-gains tax on the sale’s proceeds, which can be used to fund his or her retirement.

However the gift is made, business owners should consider it in the context of an overall estate plan, consultants say. A decision to transfer assets to some children now can raise awkward questions about the timing, nature and size of gifts to others.

Consultants frequently advise families to earmark assets outside a company for those who aren’t on the payroll. That way, the child who takes over can manage the business without having to consult siblings, some of whom may press for fat distributions.

If you don’t have other assets to give away, some experts recommend you or the business purchase a life-insurance policy in a trust in order to shelter the death benefit from the estate tax.

Email: familyvalue@wsj.com

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Dan A. Penning

Article Source: Wall Street Journal. Click here to visit the Wall Street Journal

Recent Changes to Michigan Vehicle Code

UPDATE: Recent changes to the Michigan Vehicle Code have the potential for impacting many Michigan drivers, this time in a positive way. Public Act 289, which became effective in the closing days of 2010, amends the Michigan Vehicle Code to allow eligible drivers who are ticketed for certain moving violations to avoid the imposition of points if they successfully complete an approved basic driver improvement course. Further, if the requirements of the law are met, the Michigan Secretary of State (SOS) will not report the violation to any insurance carrier, thereby allowing the driver to avoid an almost certain premium increase, surcharge, or worse.

Key provisions of the law include the following:

  • The SOS will determine if a ticketed individual is eligible to take advantage of the program. If so, the SOS will mail a notice informing the individual of the location of basic driver improvement courses and the time frame within which the course must be completed.
  • The approved sponsor of the course must notify the SOS of the individual’s successful completion of the course within 60 days after the individual received notice.
  • An individual is not eligible to take the course if:
    1) the individual was operating a commercial vehicle or was licensed as a commercial driver at the time of the violation;
    2) the violation is a criminal offense;
    3) the violation involves 4 or more points;
    4) the violation involves careless or negligent driving, a work zone speed violation or a violation involving a school speed zone or stopping for a school bus;
    5) the individual was cited for more than 1 moving violation at the same time;
    6) the individual’s license was suspended as a result of the violation;
    7) the individual previously completed a driver improvement course;
    8 ) the individual has 3 or more points on his or her record;
    9) the individual has no license or his or her license is restricted, suspended or revoked; and
    10) an individual is not eligible to take the course for a second or subsequent violation within 60 days.
  • The SOS will maintain a computerized data base as necessary to implement the law. The SOS will make the information available to course sponsors so that they can track the effectiveness of their programs and provide a report to the SOS every 5 years.
  • Approved sponsors cannot charge more than $100 for the course, a portion of which they will pay to the SOS to fund the implementation of the program.
  • Sponsors of basic driver improvement courses must be approved by the SOS.

Read the entire text of the new law online by clicking here.

Dan A. Penning

Smart Policies for Dealing with Smartphones

Increasingly, employers are providing employees with mobile communication devices such as smart phones and laptops. Most employers permit personal use of those devices, yet they tend to lack clear-cut policies to protect themselves from liability stemming from that personal use.

Perhaps the most serious risk to employers is invasion of privacy claims arising out of an employer accessing an employee’s emails or text messages on a company-issued phone or computer. Less serious, but probably more widespread, is the risk for unexpected overtime claims arising out of after-hours use of mobile devices.

Company policies should clearly state that the employer retains ownership of all company-issued devices, and that, in the course of accessing communications as needed for business purposes, personal content may necessarily be viewed.

In addition to establishing that employees should have no expectation of privacy with regard to mobile device content, employer policies should identify and prohibit harmful or illegal activities in order to better protect employers from liability relating to misuse of phones and other devices.

Similarly, well-crafted policies and practices can help an employer avoid unexpected overtime liability. For instance, the business use of mobile devices by nonexempt employees should be restricted wherever possible. Also, nonexempt employees should be required to log and report all work performed on their mobile devices outside of business hours.

Mobile communication devices can be extremely valuable business tools. Well-crafted policies and practices can help to keep them that way!

Dan A. Penning

TAX ALERT – Michigan Governor Snyder Releases 2011 Executive Budget Proposal

Budget Proposal Includes Anticipated Proposals to Change Both Tax and Spending Policies

Michigan Governor Rick Snyder called the consideration of his proposed Executive Budget a “defining moment” for the state this week as the Executive Budget was submitted to state legislators for the 2011-2012 fiscal year. Snyder commented on his budget as an opportunity to “stop living in the past and start looking to the future.”

As expected, the lynch pins of Snyder’s plan call for the reduction of business taxes by in excess of 1.8 billion and a significant reduction in spending on public schools, universities, local governments and prisons. If passed, the plan will have an immediate impact on the state’s businesses by providing a replacement of the existing Michigan Business Tax with a 6% flat tax on corporate income with some exemptions for designated small businesses. Other parts of the proposed Executive Budget call for an elimination of various business tax credits and replacing the credits with grants from the Michigan Development Corporation.

The Executive Budget also provides for maintaining the already scheduled reduction in the state’s individual income tax rate from 4.35% to 4.25% which is set to go into effect October 1, 2011. Further scheduled reductions to the individual tax rate would be eliminated. In addition, the proposal calls for the elimination of many other existing credits, deductions and exemptions.

While the proposed Executive Budget is far from being a reality and enacted into law, the stage has been set for the debate of how the new administration in Michigan will seek to solve the state’s economic difficulties.

Please stay tuned for more updates on these matters as the debate and ultimate actions to be taken unfold.

Dan A. Penning

Paid Work Breaks for Smoking Employees

Today, it is unlawful to smoke in most public buildings in many states including Michigan and Ohio. Employers who have employees who smoke struggle with work rules that are considered “fair” by smokers and non-smokers alike. At the heart of the debate is the “smoke break.” Must employers accommodate those five minute breaks throughout the day when diehard smokers huddle in the cold outside the office door? Must they pay for this time away from the workstation?

Generally speaking, employers are not required to provide work breaks of any specific length or frequency. So long as the employer compensates its employees for any hours worked in excess of 40 hours in a week, it has considerable latitude to set the workday schedule. In theory, an employer could schedule a twelve hour workday without even a lunch or bathroom break. Practically speaking, that employer will have a hard time retaining employees. So, in general, an employer is not required to offer breaks to accommodate smoking.

But to the extent the employer does provide breaks, it generally cannot dock pay for those breaks that are less than 20 minutes in duration. If people are permitted to walk to the lavatory or the water cooler or outside for a smoke, the employer cannot turn around and dock the employee for this lost productivity. Although some exceptions may apply, the general rule of thumb to be remembered is this: Permitted breaks of 20 minutes or less are with pay. If a break is to be without pay, it should be greater than 20 minutes, and it is imperative that the employee is completely relieved of duties during the unpaid break.

Dan A. Penning

Protections for Credit Card Holders

In 2009, the Credit Card Act (“CCA”) was enacted to provide protections for American consumers against unfair credit card company practices. Since roughly 80% of American families have at least one credit card, and 44% of families carry balances on their credit cards, it is important for consumers to know their rights under the CCA.

Here are a few notable reforms:

The CCA bans retroactive interest rate hikes on existing balances. Credit card companies cannot increase the interest rate due to “any time, any reason” and retroactive rate increases due to late payments are restricted. Some exceptions that permit card companies to increase the interest rate include:

  • The end of an introductory or “teaser” period;
  • The interest rate is tied to an index and is variable;
  • The consumer completes the terms of a workout plan for debt repayment or fails to comply with terms of a workout plan;
  • The consumer is more than 60 days late making a monthly payment. The card company must provide the reason for the increase and restore the interest rate to the previous, lower level after six months if the consumer proceeds to make on-time payments during that six-month period;
  • Military service members end active duty. As long as service members are on active duty, their card APR cannot exceed 6%. The Federal Reserve Board added a provision that allows card companies to increase interest rates on cards owned by service members to restore APRs to previous levels after they return from active duty.
  • “Universal default,” the practice of increasing interest rates based on their payment history on unrelated accounts, is banned under the CCA for existing card balances.Significant first year protections are imposed by the CCA. Contract terms must be clearly spelled out and stable for the entire first year on new accounts, and interest rates cannot increase except under the above exceptions. Promotional rates must be clearly disclosed and last for at least six months.

Unfair late fee traps are no longer permissible. Card companies have to give consumers a reasonable time to pay the monthly bill – at least 21 days from the time of mailing. Weekend deadlines, due dates that change each month, and middle-of-the-day deadlines are also impermissible.

Card companies must obtain a consumer’s permission to impose over-limit fees. Without this permission, purchases that would exceed credit limits will be rejected. If a consumer chooses over-limit fees, the consumer must be informed of the amount of the fees and must have the right to revoke permission at any time.

College students and young adults also receive additional protections under the CCA. For example, card companies and universities must disclose agreements with respect to the marketing or distribution of credit cards to students.

Card companies must disclose card terms in plain sight and in plain language so that consumers can see and understand the terms and plan accordingly to avoid unnecessary costs and manage their finances.

Dan A. Penning

Ongoing Bias in Favor of OEMs and Larger Tier Suppliers in Auto Sector

A recent update from the State Bar Business Law Section addresses a recent decision out of the Oakland County Circuit Court, where Judge Colleen O’Brien granted a preliminary injunction requiring an auto supplier to keep shipping parts even though the customer was delinquent in payments and, as a result, in breach of the purchase order. To the extent you work in the auto sector, be aware of what could be an ongoing bias in favor of OEMs and larger tier suppliers. The hopes were this would lessen with the shake-up in the industry, but this case suggests otherwise.

Appended below is an Opinion and Order from Judge Colleen O’Brien in Oakland County Circuit Court in Metavation LLC v. Grede LLC, Case No. 11-116105-CK granting a preliminary injunction in a supplier dispute, provided by Adam Kochenderfer of Wolfson Bolton PLLC.

In the Metavation action, the Court granted Plaintiff’s motion for a preliminary injunction after Defendant refused to produce component parts under supply contracts between the parties. Among other things, Defendant claimed that alleged late payments entitled Defendant to unilaterally terminate the contracts. Defendant further argued that the shutdown of Plaintiff’s assembly operations, and consequent employment losses, would not constitute “irreparable harm” under Michigan law. The Court disagreed, holding that

  1. the terms of the parties’ contracts control and “[d]e minimus delays in payment do not permit a party to unilaterally terminate a contract;”
  2. the factor regarding irreparable harm weighs in favor of Plaintiff because Plaintiff relied on frequent shipments of parts from Defendant, and, if Defendant ceased shipments, “Plaintiff’s manufacturing business would come to a halt;” and
  3. “the prevention of job losses serves the public interest.”

Therefore, the Court issued a preliminary injunction ordering Defendant to continue producing and shipping the component parts to Plaintiff in accordance with the parties’ contracts.

Dan A. Penning

Closing for Bad Weather: Who Gets Paid?

Many of us in the Midwest are bracing for what is expected to be the worst snow storm of the season tonight and tomorrow. Many workplaces (including our office in Farmington Hills) will be closed tomorrow to avoid the safety risks of traveling through the ice and snow. If you close early, or for a full day, how do you handle payroll?

Generally speaking, “non-exempt” employees (those people who are eligible for overtime) may be sent home early, or told not to report the following day, without pay. A few states have rules that if an employee travels to work, he or she is entitled to a certain base amount of compensation, but Michigan and Ohio are not among them. Therefore, if you close early today or tomorrow, you do not need to pay non-exempt employees for the time off.

On the other hand, you do need to pay your “exempt” employees, which will include many salaried employees. The only reliable exception to the rule is if you are closed an entire week at a time, you need not pay for that week. While the forecast is bad, it should not have us shut down for a week, so this rule will not likely apply. You do have one other option with “exempt” employees. You can require that they use available paid time off to cover the closing. But if they don’t have sufficient time off available, you still must pay them the difference.

Stay warm, stay safe, and make sure you stay clear of any wage and hour violations.

Dan A. Penning

Michigan Legislature Amends Limited Liability Company Act

While the changes are mainly technical in nature, some are substantive and worth noting. Changes to the Michigan Limited Liability Company Act (“LLCA”) took effect on December 16, 2010.

The LLCA now:

  • Enables corporations to easily convert into limited liability companies (“LLCs”) and vice versa. This represents one of the most important changes to the LLCA. Prior to the amendment, it was necessary to go through a formal merger of a corporation and an LLC to make the conversion. There are several reasons, such as tax implications and corporate governance, that may make it desirable to change the form of an existing business entity, and this process will make such a change much simpler.
  • Clarifies how a person is admitted to an LLC as a member. Previously, the LLCA indicated that a person could only become a member of an LLC at the time of formation if the person signed the initial operating agreement, but LLCs are not required to have operating agreements. Now, a person will be admitted as a member if he or she signs an operating agreement, or if the person’s status as a member is reflected in the LLC’s records. Additionally, a person can be admitted by the other members in any other writing.
  • Provides processes and guidelines for the approval of transactions with interested managers or agents (i.e., the transaction was fair, material facts of transaction were disclosed, and disinterested managers/members approved the transaction);
  • Explicitly authorizes LLCs to provide broad indemnification of members, managers, and others, subject to some exceptions. The former LLCA seemed to some to only permit indemnification of managers, not members and agents.
  • Explicitly authorizes LLCs to purchase errors and omissions (D&O) insurance for members, managers, and others. Like indemnification matters discussed above, the former LLCA was interpreted to prohibit LLCs from purchasing errors and omissions insurance on behalf of any person other than a manager.
  • Limits the rights of an LLC member’s creditor. As a result of the amendments, a creditor cannot take the member’s membership interest in the LLC and either sell it or become a member itself; creditors receive only a charging order and the right to distributions that would be payable to the member. Under the prior version of the LLCA, creditors were attempting to go beyond attaching the economic rights of their debtors and attempting to participate in management of the LLC or sell the membership interest.
  • Clarifies that members and managers of LLCs may be entities rather than natural persons.

For additional information regarding changes to the LLCA and how they affect your business, please contact me.

Dan A. Penning

Michigan’s Military Personnel Wireless Contract Act

When Members of Our Military are Transferred or Deployed Overseas

While cell phones and smart phones are a tremendous convenience, and, in some cases, a necessity, they come with an ever widening array of devices, capabilities, charges and service contracts. Ever try canceling a service contract early in order to take advantage of the latest-greatest plan offered by a competitor? While possible, the early termination fees are substantial. What happens, then, when members of our military are transferred or deployed overseas, to areas where their cell phones and smart phones are worthless? While most of us have probably never even thought of this, those who serve in our military have. Until now, their only choice was to continue to pay for service they couldn’t use for the unexpired term of the service contract, or pay the high, early termination fees charged by the service provider. At a minimum, service members facing transfer or deployment often found themselves having to deal with this trivial detail at a time when far more important matters needed to be attended to, and often from remote and obscure locations.

Early Christmas present from the Michigan legislature
This past December 9, 2010, the brave men and women of Michigan who serve in our nation’s armed forces received an early Christmas present from the Michigan legislature in the form of the “Military Personnel Wireless Contract Act.” The Act allows service members who are transferred or deployed overseas to terminate their wireless telecommunications service contracts without incurring early termination fees and penalties.

Key provisions of the Act are as follows:

  1. The Act applies to active duty members of the US armed forces, the reserve, or the Michigan National Guard.
  2. The Act applies in situations where the service member is transferred or deployed overseas, on active duty, for a period of 179 days or more, to an area where the service member’s existing wireless service provider does not offer facilities-based wireless service.
  3. The Act allows the service member, or his or her spouse, to terminate the service contract, if: (i.) the service member is a party to the contract; (ii.) the contract was entered into on or after December 9, 2010; (iii.) the contract was entered into before the service member was transferred or deployed overseas; and (iv.) the contract does not involve service to a wireless telecommunications device installed in a motor vehicle.
  4. Termination of the contract is effective upon the service member, or his or her spouse, providing the service provider with: (i.) written notice, sent by certified mail, stating the service member’s intention to terminate the contract; (ii.) a copy of the service member’s orders transferring or deploying him or her overseas; and (iii.) the service member returning to the service provider any equipment acquired from the service provider and not owned by the service member, within thirty (30) days of the notice.
  5. The service member remains responsible for all fees up to the date of termination and the Act does not apply to prepaid wireless telecommunications services.
  6. Upon the service member’s compliance with the Act, the service provider may not impose an early termination charge.
  7. Service providers who disregard the Act face civil action by the state attorney general and fines up to $2,000 per violation. Money recovered by way of fines will go to the Michigan, Military Family Relief Fund.

The full text of the Act can be found in Michigan Compiled Laws, Sections 484.1901 to 1907

Dan A. Penning

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