Helping The Business Owner To Exit

"Any transfer for less than fair market value, even if the transfer involves only a partial ownership interest, must have a valuation from a valuation specialist, such as a CPA," he added. "If the IRS comes calling, the valuation specialist should answer that call, not you, the financial advisor."

Sale of a partial interest in the businessor even gifting the business to the buyercan yield for the seller a faster payback on the transaction than a full ownership interest sale, said Brown.

Though life insurance can also play a role in funding a buy-sell agreement, Stebbins observed that such policies generally are restricted to cross-purchase or stock-redemption agreements between co-owners of a business. Less common are key person policies used for business acquisitions.

"Employing life insurance, where the insured is the key employee, to purchase the business is certainly a possibility, as you have a ready-made sinking fund," said Stebbins. "The problem in many instances is that [business owners] dont start thinking about this until 5 years prior to retirement. The insured likely would accumulate only enough money for a down payment."

An alternative arrangement, wherein the business owner is the insured but the successor owns the policy, might fully pay for the acquisition. But this ordering of the parties is less appealing, observed Stebbins, who questioned why business owners would pay for their own buyout.

Succession challenges notwithstanding, Stebbins warned that business owners will have another set of hurdles to confront in estate planning. The Economic Growth and Tax Relief Reconciliation Act of 2001, which gradually phases out the estate tax before sunsetting in 2011, might actually increase beneficiaries tax liability.

At the federal level, EGTRRA repealed the stepped-up basis rule for property received from a decedent whose death occurs after 2009, thereby transforming the estate tax into an income tax payable by estate beneficiaries when property is sold.

EGTRRA also replaced, beginning in 2005, an estate tax credit with a more onerous federal tax deduction. The law additionally prompted a number of states to decouple their estate tax credits from the federal estate tax.

"Some heavy-duty planners who do a lot of work in areas that cross state lines, as in the tri-state [New York, New Jersey and Connecticut] region, will have a nightmare," said Stebbins. "Its tough enough for ordinary business owners to understand how trust structures work. The added complexity engendered by the federal-state decoupling might prompt clients to stick their head in the sand, like the proverbial ostrich, and do nothing."

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.