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Business owner clients seeking to use the shrinking estate-tax window to pass down closely held shares may need to think through new or updated buy-sell agreements.
The potential expiration of many provisions of the Tax Cuts and Jobs Act of 2017 at the end of next year means that the minimum size of an estate subject to taxes of up to 40% at death could drop down by a half from their current levels of $13.61 million for individuals and $27.22 million for joint filers. Financial advisors, tax professionals and their clients are therefore considering a lot of estate-planning strategies that include trusts or life insurance policies.
For business owners trying to remove some assets from their estates while ensuring an orderly succession in the event of death, disability, retirement, divorces or other challenges, the buy-sell agreements are "not a direct correlation" to the possible expiration but an important factor ahead of the sunset date, said Dawn Jinsky, a certified financial planner and certified public accountant who is the leader of estate and business transition planning with Southfield, Michigan-based registered investment advisory firm Plante Moran Wealth Management.
Those discussions are also coming after a Supreme Court decision this past summer added more valuation questions about the impact of any life insurance proceeds to closely held shares that are part of an estate, she noted.
"Many people are choosing to gift closely held stock because of the decreasing exemptions, and if you are doing that, you also need to look at a buy-sell agreement," Jinsky said in an interview. "It's become an ancillary discussion that has to happen."
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With taxes that can "add up quickly" for larger estates and any number of scenarios that may leave the business in the hands of the wrong people in the eyes of one or more current owners, the agreements represent another area in which "failing to plan is planning to fail," she added.
In general, the business owners must choose between three kinds of buy-sell agreements: an entity-purchase agreement setting up the business itself to buy a deceased partner's stock; a cross-purchase deal that provides for the other holders to pick up the holdings; or a hybrid one that gives the business the first right of refusal, according to Jinsky. The Supreme Court decision in Connelly v. Internal Revenue Service brought more concerns around potential taxes on life insurance proceeds in the first and third options among businesses such as many RIAs themselves and a great number of their clients, experts have noted.