Massachusetts Family Business Spring 2012 by The Warren Group

Massachusetts

Spring 2012

FAMILYBUSINESS Official magazine of the

WHEN FAMILIES ARE YOUR FAMILY’S BUSINESS HOW FOUR COMPANIES COMPETE WITH LARGER RIVALS

Boston PoPs

2012 seAson

Family Business Association visions of america at the Pops - Special Offer May 12, 2012 PAGE 2 may 9–june 16

ke ith lockhart co n d uc to r joh n wi lliams l au re ate co n d u c to r

Plus: Special Section on Legal and Tax Issues and Opportunities Family Business Association at the Pops A special offer for the FBA*: 2-for-1 on Orchestra Seating

Gershwin sPectAculAr

A Supplement to Banker & Tradesman

Boston PoPs

2012 seAson may 9–june 16

visions of america k e ith lo c k h a rt con d uc tor j o h n w i l l iams l au re at e con d uc tor

Family Business Association at the Pops A special offer for the FBA*: 2-for-1 on Orchestra Seating

Gershwin sPectAculAr Keith Lockhart conductor Saturday, May 12, 2012 Complimentary Reception: 1:30pm Concert: 3pm

George Gershwin fans will love this Boston Pops celebration! Honoring a composer whose masterpieces are vibrant, lush, jazzy and uniquely American, the Pops will perform many of Gershwin’s classic pieces, including his iconic Rhapsody in Blue, as well his songs made famous by Fred Astaire, Ginger Rogers, and Gene Kelly, such as I got Rhythm, S’Wonderful, and Embraceable You. The May 12 concert at 3pm will feature a performance by the winner of the BSO Youth Concerto Competition. Orchestra Seating: $46.00 (regularly $92) For tickets, please call 888-266-1200 and mention code “FBA12” Code must be used at time of ordering to receive the discounted ticket rate * Available to family businesses and fbA sponsors

POPS12_FBA_Ad_Full-page.indd 1

3/22/12 10:59 AM

Massachusetts Family Business Official magazine of the

CONTENTS

FAMILY FRIENDS

2 1

These Four Family Businesses Are Ready To Help Yours Succeed

from the board The FBA continues to grow

divergent views

abundance of opinions.

fast five

Diversity of demographics isnâ&#x20AC;&#x2122;t enough to benefit from an

Five quick tips for your family business.

SPECIAL SECTION: LEGAL AND TAX

tax tales Tax implications of selling your family business.

the s-corp trap If your family business is an S corporation, there are tax implications for a surviving spouse.

interstate commerce

The Internet has greatly expanded the ability to do business nationally, but tax ramifications may follow.

gifting your business The uncertainty surrounding the estate and gift taxes requires special attention this year.

economic silver lining Now may be the right time to implement these tax strategies.

alimony reform A new law may bring relief to business owners delaying

retirement due to alimony obligations. 3

from the board

Truth Is In The Numbers By Jeffrey S. Davis

If you are part of a family business, you know the hard work and perseverance it takes to succeed. The numbers behind that hard work are staggering. With the tasks, to-do lists, plans and daily meetings of the life in business, it is easy to forget the big picture. It is easy to lose sight of the impact one business has on a larger interwoven comJ E F F RE Y S. D AV I S munity throughout the country. In the United States, family businesses serve as a powerful economic force, providing 50 percent of the gross domestic product. From small businesses to large corporations, family businesses make up an integral part of the engine that drives our economy. You might be surprised by just how big this role in the recovering economy is. Family businesses range in size and structure, from mom-and-pop shops to large corporations. Out of all Fortune 500 companies, 35 percent of them are family companies. Fueling half of the gross domestic product, family businesses are also a crucial factor in decreasing the deficit and closing the unemployment gap. Even now, in a difficult economic climate, family businesses account for 60 percent of the nation’s em-

ployment and 78 percent of new jobs created. Family business statistics are impressive. At the Family Business Association, we recognize how powerful family businesses are and the importance of supporting, educating and strengthening this group. The FBA is proud to be a leading advocate for family business in Massachusetts. Since our beginning in 2007, the numbers in the Family Business Association are as remarkable as those for family business throughout the country. Our first awards ceremony saw 10 finalists and winners. By 2009 that number had increased to 18, and in 2011, we celebrated 27 outstanding organizations for their enduring hard work and dedication. This year, as the application process for the 2012 awards opens and family businesses apply and are nominated, we expect to see those numbers grow. It is exciting not only to see family businesses receive the recognition they so rightly deserve, but also to see a whole community come together to support each other and celebrate in each other’s success. Part of the mission at the FBA is to provide families with valuable opportunities they can take advantage of throughout the year, before and after the awards. Our educational programs have also seen tremendous growth. Starting with a few pro-

grams in 2007, the FBA now offers at least one educational program per month. Our programs focus on the most crucial issues and topics facing family businesses today. In 2012, the FBA will offer families a range of events including webinars, symposiums, and a FBA family concert at the Boston Pops. Featuring highly respected family business leaders, and designed to target the specific needs of the family business community, our educational programs and special events build on the important foundation of business education and serve as an important tool for family business growth. Again, this year, the FBA has collaborated with outstanding media partners. Our presence in the media gives families significant opportunities to promote their businesses and share their wonderful stories with a larger audience. The FBA has created a unique non-profit partnership with television, radio and print media organizations by joining forces with Comcast, Entercom Communications, The Boston Business Journal and The Warren Group. All of the media outlets, along with our other corporate sponsors, have come together to support the efforts of family businesses. Together, they have helped us broadcast the message of family leadership in 41 of the mostwatched television networks and over two million households. This reaches virtually Continued on page 19

JEFFREY DAVIS IS CHAIRMAN AND CEO OF MAGE LLC AND A CO-FOUNDER OF THE FAMILY BUSINESS ASSOCIATION.

Massachusetts

FAMILYBUSINESS

Official magazine of the Family Business Association. Inc.

DIRECTORS Jeffrey S. Davis, Mage, LLC

101 Huntington Ave., Suite 500 Boston, MA 02199 fbaedu.com

Al DeNapoli, Tarlow, Breed, Hart & Rodgers, P.C. Brian Nagle, BNY Mellon Wealth Management

PRESIDENT

TREASURER

Edward D. Tarlow, Tarlow, Breed, Hart & Rodgers, P.C.

Richard A. Hirschen, Gray, Gray & Gray, LLP

VICE PRESIDENT Catherine Watson, Tarlow, Breed, Hart & Rodgers, P.C.

Editorial | Advertising | Design A Family-Owned Business Since 1872 280 Summer Street, Boston, MA 02210 Phone 617-428-5100 Fax 617-428-5119 www.thewarrengroup.com ©2012 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher.

As sponsors of the

FBA Awards for Massachusetts 2012, we pledge to support excellence in family businesses all year long. GOLD

WEALTH MANAGEMENT

FINANCIAL NETWORK

SILVER

BRONZE

The Kelliher Corbett Group at Morgan Stanley Smith Barney

Media Supporters

Visit www.fbaedu.com. 5

Differences of Opinion Diversity of Thought Is About More Than Race, Gender and Board Structure By Christina P. O’Neill

he inclusion of women, minorities and a mix of age groups on family business boards or advisory groups is usually presented as “the right thing to do.” But diversity by demographics alone will not help management address critical business issues and capitalize on opportunities. The more pertinent objective is to have diversity of thought across DAV ID G R O S S M A N a group of people with the right experience, and then – crucially important – listen to them. Even a small company can benefit from and be “big enough” to engage those who offer differL E SL IE M U R P H Y ences of opinion. Margery Piercey of Wolf & Company, P.C., which underwrites the Family Business Association’s Webinar Wednesday programming, conST E P HAN I E vened three prominent SON N AB EN D and successful business leaders, all of whom have served on family business governing or advisory boards themselves, to offer varying perspectives on the subject of diversity of thought in family business leadership. David Grossman is co-president of Grossman Marketing Group, a fourth-

generation marketing communications firm with about 100 employees. Leslie Murphy is a CPA and founder of Murphy Consulting Inc., a corporate advisory firm. Stephanie Sonnabend is president of Sonesta International Hotels Corp., formerly a publicly-traded third-generation family-controlled hotel management and franchise company which was sold late last year and taken private. Declaration of independence As their webinar discussion pointed out, a board or advisory group with diversity of thought represents all stakeholders. Of course, primary stakeholders are owners and employees. While not independent these stakeholders have a vested interest in successful business strategy and effective policies. Independent directors or advisors, representing customers, creditors, strategic partners and suppliers, for example, are a critical component, says Sonnabend. An outside board or advisory group member has little or nothing to gain by telling management what management wants to hear, she says. And whether it’s a formal board or an advisory group doesn’t matter, as long as there are independent members. “In a family business, the independent advisors can be impartial to family issues. That’s an important role.” Directors with varied backgrounds and experiences approach problems differently and ask thoughtful questions. They provide advice, resources and contacts. Essentially, diversifying a board or advisory group is like diversifying investments – opportunities come from a variety of sources. “We hear that CEOs want

CHRISTINA P. O’NEILL IS EDITOR OF MASSACHUSETTS FAMILY BUSINESS MAGAZINE. 6

to have other CEOs on their board, but that’s still not fully diverse,” says Sonnabend. “A room full of one of anything is not diverse.” Sonnabend is a founder and chair of the 2020 Women on Boards initiative, a national campaign to raise the percentage of women on U.S. corporate boards to 20 percent or greater by the year 2020. “You want enough women so that women are not a token,” she advises. But consistent with her position on diversity, she is not a proponent of an all-female board either. Family business owners should be upfront about the nature of the assistance they seek, and structured in the information they share. Additionally, items of discussion should be things that are of value, not minutiae, and an outside board or advisors shouldn’t be brought in to mediate family issues. “Not that the board can’t get involved in family issues and help if there are disputes, but that shouldn’t be the board’s sole function,” she says. Experience first Family-owned businesses can use far less formal mechanisms, such as advisory boards, to achieve varying degrees of diversity of thought in leadership and decision-making. The owners of Grossman Marketing Group, for example, decided to assemble an executive committee rather than a formal board of directors for the 100-employee company. “Be realistic about what you as an owner can handle,” says David Grossman. Regarding establishing a formal board of directors with independent members, he cautions, “If

you can’t handle the commitment of time or money, … you will fall flat on your face and look terrible to your employees.” Most employees, he adds, don’t care if a company has a board or not – they care more about a good work environment in which relationships are valued. Grossman Marketing Group’s executive committee consists of six top managers, some long-term employees, and others with service at other companies, some of which are household names. The group’s age range is 68 to 31, and the technological savvy of the younger members is complemented by the perspective of the older members on the cyclical nature of markets. The executive committee also relies on outside counsel from its accounting and law firms. Leslie Murphy served 34 years at Plante & Moran, PLLP, one of the nation’s largest CPA and management consulting firms, and is a past chair of the AICPA, and the third woman to hold that post in the organization’s 124-year history. Her board service includes three multi-billion-dollar companies. Murphy concurs that experience, rather than administrative structure or demographics, makes a business run successfully. “Unless you’re solving your needs with the expertise, it’s not a good use of diversity,” she says. Advisory committees Diversity of thought can occur without the establishment of a formal board or advisory committee, she says, by tapping lawyers, CPAs and other experts for their particular skill sets. The beauty of a family-owned business is that management doesn’t have to be wedded to any particular model, Murphy says. Publicly-owned companies require formal boards – groups of elected or appointed members with fiduciary responsibility for oversight of an organization. They have the authority to approve or disapprove strategies and policies, such as management accountability and performance, succession planning, budget review and setting salaries and compensation. Legal responsibilities vary by jurisdiction. Their benefits include objectivity and discipline for reporting, planning and accountability. Their drawbacks: cost, administrative time and a loss of flexibility.

But a family business can explore less formal ways to tap into diversity of thought. Using a formal or informal advisory board limits the fiduciary responsibility and liability of those serving in the advisory versus governing board capacity, freeing up resources to provide the most value to management. Management must foster an environment that welcomes different viewpoints. For example, management must communicate to non-family employees their significance to the organization by listening and demonstrating willingness to follow their recommendations. The same goes for seeking outside directors. “You’ve got to decide what your needs are,” Murphy says. “If your kids started working at the business in the third grade, might you want to get different thinking in the room?”

may involve some level of compensation, many are willing to offer diversity of thought to a family business board or advisory council because the service provides an opportunity to learn about a complementary business to their own or becomes the means by which the candidate can initiate a relationship with other board or advisory group members. Adds Sonnabend, whose board experience includes Century Bancorp and Century Bank & Trust, New England Conservatory of Music and Beth Israel Deaconess Medical Center, “What value will I bring, [and] what value will it bring to me?” Value may be in the form of personal satisfaction which goes a long way in motivating highly successful and very bright people. Reiterating Grossman’s caution, remember that you are making a commitment to these people to communicate and be engaged with them. Murphy emphasizes that diversity for Something of value the sake of diversity, isn’t worth the effort, In order to attract the people with the right but great value can be gained – growth, experience, family businesses must present a profitability, stability – from diversity of good value proposition to prospective board thought if it is matched with the needs of or advisory group candidates.1While n BFM 4.75x4.75 ad v2_Layout 8/9/11service 11:11 AM your Pagebusiness. 1

Offering comprehensive investment counsel and estate and planning services to financially successful individuals, families and endowments for over 35 years.

— We invite you to contact Mike Brown at MikeB@BFMinvest.com —

ONE WINTHROP SQUARE, BOSTON, MA 02110 617-338-8108

www.BFMinvest.com

Tax Consequences of Selling a Business By Erica Nadeau, CPA

henever a family business owner sells a business, there’s good news and bad news. The good news is that you will likely have more money than you’ve ever had before (unless you’ve sold other businesses). The bad news is that you will be sharing some of it with the government. How much of it you keep and how you structure the sale depends largely on E RICA N A D E A U your business entity, so it is important to consider your exit strategy when you start your business. Businesses are set up in one of three ways: sole proprietorship, partnership/ limited liability company (LLC) or corporation. When a business is structured as a sole proprietorship or a partnership, the sale of the business will be an asset sale, where the buyer buys only the assets of the company, not the liabilities or the business in its entirety. Assets included are typically accounts receivable, inventory, fixed assets, customer lists and goodwill. The income from the sale of the assets is reported on the individual tax return of the sole proprietor or the partner. The allocation of the purchase price to each asset determines how the income will be taxed. For example, the sale of any inventory and covenant not to compete will result in ordinary income. The sale of equipment, real estate and goodwill will result in either capital gain, Section 1231 or ordinary gain income. The buyer will usually try to get as much of the purchase price as possible allocated to items that would be considered “ordinary gain” to the seller, because the buyer can typically expense those items in 8

the first year of business, instead of capitalizing the assets and depreciating them over time. It is important for the seller to consult tax and legal advisors when reviewing any letter of intent to ensure a fair allocation of the sale of each asset. The buyer may also try to enter into an installment sale with the buyer for the purchase price of the business. An

installment sale is when the seller issues a note to the buyer to have the purchase price paid over an agreed-upon number of years. This would allow the seller to defer the tax paid on the sale of the business over the life of the note. The amount of profit to be recognized in each year would be calculated in the first year and applied to payments

received in each subsequent year. The buyer would be required to pay interest on the note, which is reported as interest income to the seller. An installment sale may not be beneficial if tax rates are projected to increase or if the individual expects to be in a higher income tax bracket in future years. When the buyer and seller cannot agree on a purchase price, they may enter into a contingency sale. The sale price of the business in a contingency sale is based on future facts, such as target sales and earn out. If there is a cap on the amount a seller can receive, the profit percentage to be recognized each year will be based on the maximum amount the seller can receive. The adjusted basis of the property would be allocated over the length of the agreement. Contingency sales are complex, so it is recommended that advisors be consulted as early as possible. If the business is structured as an LLC or a corporation, the sale could either be an asset sale or a stock sale. An asset sale will have the same result as if the LLC or corporation were a sole proprietor or partnership, with the income flowing through to the owner or owners. In a C-corporation, an asset sale would generate the same categories of income as the other entities, but the corporation itself would pay tax on the income, and there are no preferential gains rates at the corporate level. The C-corporation can determine if the sales proceeds will flow to the shareholders through a distribution for which the corporation will not receive a deduction or, if appropriate, through additional compensation to the employee shareholders. In the C-corporation structure, it is important to watch for the double tax on the sale income. A stock sale of either an LLC (except a single member LLC or a partnership) or any form of corporation would result in capital gain treatment for the seller, just as if he or she had sold shares in a publicly traded company. This type of sale has the greatest tax advantage to the seller, as capital gains tax rates are currently lower than ordinary income rates. However, a

stock sale tends to be unappealing to buyers, as they must assume all current debts and potential liabilities, including unforeseen future litigation against the company. The buyer also cannot step up the inside tax basis of the assets. Understanding how the structure of

your business can and will affect your exit strategy is a key element to an exit plan. Knowing the tax implications of a sale will give you a clearer picture of what the sale means in real after-tax dollars and will provide you with the knowledge needed to negotiate the best deal. n

ERICA NADEAU IS A PRINCIPAL IN THE COMMERCIAL BUSINESS GROUP AT DICICCO, GULMAN AND COMPANY.

Helping family owned businesses succeed since 1901. We are an independently owned and operated group of highly trained professionals dedicated to helping family business owners, like you, achieve your financial goals.

Family & Business Advisory Group

速 James Bianchi, CLU, ChFC James S. Wolfson, CFP速, CLU, ChFC Herb Daroff, J.D. CFP 速 Shaun Erickson, CFP Scott Falk, Timothy M. Duffany Managing Partner

Baystate Financial Services offices throughout New England: Massachusetts: Boston, Marshfield, Wakefield, Wellesley, & Worcester Rhode Island: East Providence ~ New Hampshire: Manchester, Nashua, & Exeter Maine: Falmouth & Portland ~ Vermont: Colchester & Montpelier

Herbert K. Daroff, J.D. CFP速

Estate and Business Planning Specialist Baystate Financial Planning hdaroff@baystatefinancial.com 617-585-4502 Boston Common Partners, Baystate Financial Services and Baystate Financial Planning ( a registered investment advisor ) are separate non affiliated entities each of which are independently responsible for the products and services they offer. The family business advisory group aims to meet the needs of small business through the products and services they respectively offer. L0910131292 09/11 (MA, NH, ME, RI, VT)

The S-Corp Tax Trap Potential Estate Tax Trap for Family-Owned Businesses By Robert Prifti and James Goode

amily owned businesses are commonly held as S-corporations, and estate planners should be wary of a potential tax trap that could lead to unintended and adverse income tax consequences in certain circumstances. The main driver is the disparity between “inside” and “outside” tax basis in the S-corporation stock in the hands of a surviving spouse (or trust for the benefit of surviving spouse) when the underlying operating assets of the S-corporation are monetized to cash and distributed. This article provides a brief overview of the estate and income tax rules, and takes the reader through an illustration of the potential pitfalls and how to avoid them. Facts • An S-corporation is a profitable entity generating revenue from operating machinery. The machinery has high fairmarket-value (FMV) and low income tax basis due to prior depreciation deductions. • A 100 percent S-corporation shareholder dies, leaving stock to the surviving spouse, or a qualifying testamentary trust for the benefit of the surviving spouse. • The surviving spouse receives a step-up to FMV in tax basis in the S corporation stock acquired from the decedent at date of death or alternative valuation date. The stepped-up S corporation stock is the “outside” tax basis referred to above. • Although the tax basis in the S corporation stock can be significantly stepped up upon the death of the shareholder, the tax basis of assets inside the S corporation are unaffected, thus creating the disparity between “inside” and “outside” tax basis.

• The goal is for the surviving spouse to continue operations for many years, with no plan for liquidation or redemption of S corporation shares. • To meet the long term cash flow needs of the surviving spouse, it has been determined periodic sales of the S-corporation’s assets will be necessary. The compensation previously paid to the decedent will be used to retain replacement personnel to sustain the operations. • Additionally, the corporation, its operations and its stockholder are resident in Massachusetts. Issue Under the above fact pattern, the periodic monetization through the sale of underlying S-corporation assets would generate substantial IRC §1245 recapture income taxed at ordinary tax rates to the lesser of: a) the sum of all depreciation or amortization deductions allowed or allowable; or b) gain realized on the disposition, with IRC §1231 gain on any applicable excess. Could an alternate structure achieve the desired cash distributions from periodic monetization of company assets without the adverse income tax treatment? Planning considerations In the present case, ownership of the assets in a S-corporation is not only a sub optimal structure as an asset included in a taxable estate, due to the inside/outside basis issue, it also has a current annual income tax cost associated with it. Massachusetts imposes an entity level income tax on an S-corporation. This corporate level of tax would not be imposed on a partnership or limited liability corporation (LLC). In addition, having S-corporation stock in an estate limits the executor or heirs as to whom they may sell shares. S corporations

BOB PRIFTI AND JIM GOODE ARE MANAGING PARTNERS IN THE BOSTON OFFICE OF WTAS. 10

can only have 100 shareholders so compensatory stock grants or a management buyout of the shares might not be possible. It also limits who may be a shareholder, excluding C-corporations, a regulated investment company (RIC), a real estate investment trust (REIT) or a tax partnership among certain others. Foreign partners are also not permitted, as well as attempting to issue another class of stock, say for a preferred equity raise. Selling the shares of an S-corporation with a significant unrealized gain on its assets to a disqualified shareholder would result in the buyer requesting an asset sale or a significant discount on the value of the stock. In short, an S-corporation is not the most flexible organization to have when you anticipate a need to raise and distribute funds. Had the S-corporation been an LLC or a partnership, the resulting step-up in basis which now resides in the shares of the S corporation stock, could have been applied instead to the underlying business assets themselves. This higher basis would first provide a new higher current value for purposes of depreciation, thus preserving cash flow with regard to taxes on current income, as well as providing a higher basis in determining gain should an individual asset be sold. Alternative plans LLC migration: Converting an S-corporation to an LLC is not without issues. As we all know, getting the assets out of the corporation usually involves some recognition of tax. Selling the assets to the new LLC is obviously not an option, and distributing the assets out of the S-corporation would cause recognition of gain under IRC §311. An alternative to distributing the assets out to the shareholder would be for the S corporation to contribute the assets to a

new LLC. Appreciated assets of the S corporation would be contributed down and a preferred member interest in the new LLC would be taken back for value. The common member interests in the LLC could be issued to the current shareholder or others, again for value. This scenario would allow a structure in which all new business would be originated in the LLC and a migration of value in the S-corporation assets to the LLC could be accomplished over time through redemptions of the preferred LLC member. During the following years, the S-corporation is gradually redeemed out of the LLC, leaving the common LLC member (shareholder) owning the business assets in the desired LLC format. Careful planning is needed in the redemption of the preferred LLC member so as to not end up with a disguised sale under IRC §707, or some other undesired taxable event. By converting the ownership of the physical assets from that of an S-corporation to an LLC, the LLC would be able to step-up the value of the physical assets in the LLC at the death of the decedent, by virtue of making an IRC §754 election (an election

which allows an increase in tax basis to FMV – available only to entities treated as a partnership for tax purposes). This technique should then solve the inside/outside tax basis issue, as well as the unintended and adverse income tax consequences should the company remain an S corporation and distribute cash from an underlying asset sale. Distributions in redemption of stock to pay death taxes: Barring a full conversion to an LLC, all is not lost in continuing to hold assets in the S-corporation. Another consideration to keep in mind upon the passing of the second or surviving spouse is the favorable treatment under IRC §303, which offers an opportunity to withdraw funds for death taxes, funeral expenses and administration expenses from the corporation on a tax-favored basis. If all relevant requirements are met, qualifying amounts received from the stock redemption are treated as payment for the stock, thus treated as capital gains instead of a dividend. Because the basis in the estate’s stock is stepped up to FMV at the decedent’s death, the recognized capital gain is limited to the stock’s appreciation in value after death. Therefore, the redemption can be accomplished with

little or no income tax effect. Even if the estate has sufficient liquidity to pay its taxes and other obligations, an IRC §303 redemption is a way to extract cash from the S-corporation. Although the amount of funds eligible for IRC §303 treatment is limited to death taxes, funeral expenses and administration costs incurred by reason of the death, no requirement exists for the funds to actually be used that way. Accordingly, an IRC §303 redemption could be utilized in situations where there is ample liquidity, with the heirs desiring to monetize to cash part of the S corporation value. To qualify for IRC §303 treatment, the value of the redeeming corporation’s stock included in the decedent’s estate must exceed 35 percent of the excess of the decedent’s gross estate over amounts allowable as IRC §§ 2053 and 2054 deductions (i.e., funeral and administration expenses, debts related to property included in the estate, and uninsured losses incurred during administration of the estate). It should be noted that distributions on stock held by the estate will not qualify for IRC §303 treatment if, under the will, stock passes to a beneficiary free of death expenses (e.g., a martial deduction trust). Thus in our fact pattern, IRC §303 treatment would only be available upon the passing of the surviving spouse, which could be many years away. Conclusion Estate planners and tax advisors should be wary of the potential negative and unintended income tax implications in certain S corporation structures, especially where a surviving spouse needs to convert underlying assets to cash to cover cash flow needs. In the end, an LLC migration should prove useful in eliminating the negative income tax implications, as well as provide flexibility for heirs who may wish to sell their ownership interests. n 11

3 2 1

Marlborough site, Next Generation

Building a Sense of Community Tartt’s Day Care Centers Inc. 495 Harrison Ave., Boston 1010 Massachusetts Ave., Boston 1424 Tremont St., Boston 617-442-9807

What’s Best for the Children Next Generation Children’s Centers 307 Boston Post Road Sudbury, MA 01776 866-711-6422

Bessie Tartt Wilson firmly believed in fostering happiness, confidence, health and love of learning in children within a comprehensive, structured curriculum. That philosophy became – and continues to be – the keystone of Tartt’s Day Care Centers Inc. What began as a one-woman, single-site operation in 1946 has blossomed into a thriving business with three locations and a staff of 45, still familyowned and operated. President Mary Reed, Bessie’s daughter, serves in an advisory capacity, while her children Ken Reed and Wanda Geer are COO and CEO, respectively. Altogether, four third-generation and two fourth-generation family members are intimately involved in the business. The curriculum at Tartt’s comprises traditional academic subjects that are taught in English, Spanish

When Donna Kelleher sought an appropriate childcare facility for her first grandchild nearly 20 years ago, she hit a dead end. Many centers closed at 5 p.m., on holidays and during the summer. She realized the best solution was to launch her own business. Next Generation Children’s Centers opened its first location in Natick in 1993, and has since grown to 10 sites with more than 550 staff members. President and CEO Kelleher explains that Next Generation offers a range of programs for infants through kindergarteners, and also features a summer program. The facility focuses on the needs of the family, continually seeking input from them and matching its programs to those needs. Next Generation’s holistic approach integrates academics, physical fitness, cultural awareness and technology into its programs. The educational component melds the philosophies of Piaget,

Continued on page 14

From

Our Family to Yours The Willingness to Try New Things Associated Home Care, Inc. 100 Cummings Center, Suite 406F Beverly, MA 01915 978-922-0745 In recent years, aging in place has become the universal mindset, particularly with the boomer generation. Since 1991, Associated Home Care has been committed to delivering the maximum level of care for those living at home, as well as residents in assisted living facilities, those on hospice or in any other care situation. Continued on page 15

Making Size Work to Their Advantage

ho better to serve the needs of family than a familyowned business? From crib to nursing home and each stage in between, every family has unique requirements. In many cases, family-owned businesses have been in these situations and clearly understand the complexity of navigating daily challenges. Their ability to devise effective solutions comes from experience. They also understand the importance of building relationships and trust as they deliver the highest quality services and products to their customers. Family-owned and operated businesses exemplify a legacy grounded in hard work, commitment and passion for what they do. They are vested in the business and cognizant of the awesome responsibility of upholding a hard-earned reputation. Todayâ&#x20AC;&#x2122;s family-owned businesses represent the best of two worlds: old-fashioned qualities, such as honesty, reliability and personalized service as well as the latest in technological advances. In this issue, we take a look at four businesses that serve the needs of families at both ends of the life spectrum. The stories of how these businesses began, grew and prepare for the future will offer a glimpse at the fervor and dedication these families have vested in these enterprises.

Cape Medical Supply, Inc. 28 Jan Sebastian Drive Sandwich, MA 02563 800-339-3322 In 1977, Mark and Nancy Sheehan had a vision: to address the home health care needs of individuals living on Cape Cod and the surrounding area. Some 35 years later, Cape Medical Supply continues to provide products and services related to sleep therapy, home respiratory care and home medical equipment, although its geographic reach has been extended. Cape Medicalâ&#x20AC;&#x2122;s service area now includes eastern Massachusetts, southern New Hampshire and Maine, where the company operates as Seacoast Respiratory.

When the founders retired in 2006, their son Gary became president and CEO; the following year, their second son, Michael, joined the companyâ&#x20AC;&#x2122;s finance department, and in 2011, a third son, Kevin, was appointed director of professional relations for Seacoast Respiratory. Continued on page 15

1 Tartt’s Day Care Continued from page 12

and sign language. Artistic endeavors, including music and creative movement, fulfill the school’s mission. “These are important because when a child participates in music, he feels part of a group, socially connected. Engaging in music also improves memory and teaches the child how to work cooperatively with others. This was our grandmother’s philosophy,” Geer says. “We want to educate the whole child. We are not just looking at academics, but also at social skills, languages and cognitive development.” Families who bring their children to Tartt’s expect – and get – affordable, high-quality care and first-class customer service. “We forge relationships by showing that the administrators and owners are highly vested in the business. All of our family members are on-site. We’re a customer service and customer-driven business,” says Reed. “Also, we don’t carry the same level of administrative overhead that [national] chains do, so we can pass along savings to our customers. We have highly competitive tuition rates and don’t charge the fees that others may charge.” Tartt’s attempts to build a sense of community among all involved with the school. “As family members we under-

Mary Reed.

Founder Bessie Tartt Wilson with young clients in 1946.

stand our tradition, our history, where we come from. We have seen firsthand the hard work it takes to grow and maintain a good reputation. Our personalized service gives us an edge,” says Geer. In the coming years, Tartt’s anticipates maintaining its strong presence as a familyrun business in the competitive childcare industry, but, like all businesses, faces challenges. Preparing the next generation to effectively care for children amid the changes in the childcare market can be daunting, according to Geer. “The rules and regulations are forever changing,” she says. “Another challenge we face is incorporating social me-

Next Generation Children’s Centers Continued from page 12

Montessori and Emilia. “We are always developing curriculum to enhance the student experience,” says Kelleher. “We are taking the best of the best in our teaching philosophy.” Kathleen DelPrete, Kelleher’s daughter, is executive vice president and vice president of finance. DelPrete notes that a national spotlight on obesity and the medical repercussions from this condition has prompted the business to respond. “Our parents were also clamoring for a fitness program,” she says. With that in mind, every Next Generation school design contains one or two interior gyms with a 10,000 to 15,000 square foot outdoor play space. “There is lots of room to run. On a nice day, the classes go outside and during bad weather, they can play inside,” she says. To develop an appreciation for music, Next Generation regularly conducts sing-a-longs 14

Next Generation Children’s Center Sudbury staff celebrating Dr. Seuss’ birthday.

and a Spanish specialist brings language and awareness of other cultures to the classroom. Kelleher says, “This exposure helps to broaden the children’s view of the global society.” Cognizant of the importance of technology, Next Generation employs a number of high-tech tools in its teaching plan. The use of Smart Boards in the classroom offers an interactive experience for the children without using a computer. “The whole world will be technology-based in the future. We want to give the child an edge to feel comfortable with and maneuver these pieces of equip-

dia into our mission. We want to be able to reach parents through social media, yet still maintain a personal touch.” Reed points out that small businesses, like theirs, are the “cornerstone of the American economy.” He says, “It’s all about job creation and job training. We’re a part of that, trying to help make the community a better place to live.” Adhering to the tenets of its founder, all staff at Tartt’s continues to emulate her work ethic, attitude toward customers and passion for cultivating a love of learning in children. Geer says, “To nurture and educate future generations is an awesome responsibility and one we take seriously.”

ment,” says Kelleher. During the last two decades, Next Generation has earned a reputation for providing a rock solid, all-inclusive foundation for children, which has helped to grow the business. “Eighty percent of our students come from referrals,” says Kelleher. Sensitive to the negative impact a fragile economy can have on a household’s fiscal situation, the school works with parents to maintain continuity in their child’s education. “Because we are family-owned, we can quickly adapt to the needs of the families. At the end of the day, what’s best for the children is the important thing,” she says. “Today’s parents understand the value of early childhood education and want their children to have an edge,” says Kelleher. “Academics are a given, but children need the social and emotional skills that are so vital to successful interaction with their peers and adults.” And that’s what Next Generation is all about.

3 Associated Home Care Inc. Continued from page 13

President Michael Trigilio bought the company from his mother in 2005 and has tripled business in the last seven years. Associated Home Care provides personal care service, including meals, laundry, housekeeping and transportation to more than 2,500 elders across 89 different communities through partnerships with various agencies and the Elder Service Plan of North Shore. In 2007, Trigilio founded Elder Home Options, LLC, to assist elders and adults with disabilities find alternative arrangements when living at home is no longer safe. The operation manages four properties that house 15 residents and plans further expansion. Associated Home Care builds its model of care on the individual’s needs as it fosters a relationship based on trust. “We start with a blank piece of paper and ask the clients and families to tell us their needs, situations, etc.,” says Trigilio. “We are very flexible. There are no rules as to what clients can ask for and what they can’t.”

Cape Medical Supply Inc. Continued from page 13

President Sheehan attributes the company’s success to its ability to forge and maintain good relationships with physicians, patients and payors. “We work with hospitals and physician offices after diagnosis to make sure patients are taken care of appropriately. We have the infrastructure that enables us to do that effectively,” he says. “We also listen to the problems physicians’ offices are having and determine how we can create a solution. Our success is about listening and creating the right program or strategy.” During the last nine years, Cape Medical has boosted staffing from 15 to approximately 60 today. “Depending on their function, they receive specialized training. From respiratory therapists and delivery technicians to customer service representatives and reimbursement specialists, they all have unique skill sets and receive cross-training that fulfills our mis-

There are no rules as to what clients can ask for and what they can’t — Michael Trigilio Trigilio, utilizes his expertise in information technology and software design to create efficiency programs for the health care industry. The customized program he designed for Associated Home Care enables the business to regulate the delivery of services, monitor staffing and manage other related factors. “As we grow, we realize we couldn’t do this if the system were not in place,” he says. According to Trigilio, family-owned businesses have the advantage of flexibility. “We have the willingness to try new things. We can look at each other and ask if a new venture is worth the time, energy and money,” he says. “Other larger, national companies have to follow a very rigid [internal management] system.”

sion and who we are,” Sheehan says. In spite of its growth, Cape Medical’s size works to its advantage, according to Sheehan. “We compete against large national companies that often have a bureaucratic decision making process,” he says. “We are able to be very nimble in the way we deal with the client and can tailor our offerings to individual needs. It’s

During the last nine years, Cape Medical has boosted staffing fourfold.

a customized, personalized way of dealing with people.” While current economic conditions make running a successful business difficult, Cape Medical has been “very fortunate, given the depth of challenges.” Sheehan says, “We have tried to keep the level of communication very high. We’ve been

However, family businesses are not immune to challenges. In the last five years, Associated Home Care has grown from a six-person operation to a staff of 28. “With that growth comes its own challenges of having to give up control of some aspects,” says Trigilio. “This is tough in a family business. If you try to do it all, it won’t work. I try to focus on long-term growth strategy and surround myself with strong management players for day-to-day operations.” Additionally, smaller businesses struggle to offer benefits employees at the bigger chains provide. “The balance between risk and reward has become one of the biggest challenges,” Trigilio says. Associated Home Care has offices in Beverly, Marblehead and Burlington and will open its North Andover site this year. “We plan to open a new office every two years,” says Trigilio. “And we expect to hire between 30 and 45 new people for the North Andover office.” In the end, home health care focuses on relationships. “Ultimately this job is about people, the workers and the people in the homes,” says Trigilio.

straightforward about the direction of the company and have looked longer term.” Cape Medical features tangible technological differences that solve physicians’ reporting needs and that help maintain connection with customers and foster a continuum of care. “We have industry specific wireless monitoring. Technology offers physicians and payors an opportunity to see how efficacious a treatment is. It’s a win-win-win situation,” says Sheehan. “New technology is creating operating efficiencies.” Admittedly, family-run businesses face unique pressures that other companies don’t. “Family businesses are ripe for levels of conflict that can be much more toxic than in a non-family business,” Sheehan notes. But in the case of Cape Medical, the three brothers have created a succession plan that respects each individual’s different operational role. “I give credit to Mom and Dad for raising us the way they did. They set clear expectations – it’s family first and the business second. Being open and honest contributes to the level of harmony,” he says. n 15

Meeting the ‘Taxing’ Challenge of Interstate Commerce By Edward J. Berardi, CPA, JD

he global economy has re-defined the way in which many companies conduct business, with an increasing number of family and small businesses performing commerce outside their home state. Depending on the level of presence or “nexus” in other states, companies may be subject to income taxes from non-resident state tax. EDWARD J. BERARDI As a result of decreased state revenues, states are now aggressively pursuing companies they believe have sufficient nexus in their state. And locating those businesses is not much of a challenge for two significant reasons. There exists a variety of ways in which nexus can be established and technology has made it fairly simple for states to track down non-resident companies which have not complied with their tax filing laws. The most common activities which may demonstrate nexus include: • Meeting the minimum threshold of sales within a particular state • Hiring an employee within the state • The use of subcontractors or agents within the state • Delivery of merchandise within the state via company-owned vehicles • Maintaining a facility within the state Once a company exceeds the minimum standards of nexus in a particular state, the company is required to file an income tax return in that state. The company’s profits are then divided between its resident state and non-resident states in which they are conducting business based on an apportionment factor; take note that apportionment factors

vary from state to state. Generally, income is apportioned using a formula incorporating some or all of the following factors: a breakdown of sales to each state; wages paid in the various states; and property located within each state. A state specific apportionment percentage is calculated based on the above-mentioned factors to determine the company’s taxable income in that state. In basic terms, essentially, the total profit is divided and taxed among the states where the company does business based on the states’ tax structure. The cost to companies that fail to comply with nexus rules can be quite costly. As illustration of the considerable expense of non-compliance, consider a Massachusetts-based company that meets the nexus standards for New York and New Jersey. The company files its state income tax returns in Massachusetts and pays Massachusetts tax on 100% of its profits. And then things get interesting – both New York and New Jersey audit the company and determine that nexus was established within their states. Since tax returns were not filed for those states – and as a statute of limitations does not apply – New York and New Jersey are free to assess the Massachusetts company for all back years where nexus existed in their states. Typically, states will go back five to seven years; back tax returns must be prepared for that time period and taxes and interest will be owed … in addition to payments for failure to file and failure to pay penalties. Our example company can file amended tax returns with Massachusetts showing less than 100 percent apportionment of income to Massachusetts, thereby obtaining refunds for income taxes overpaid. But there are a couple problems with filing amended tax returns in Massachusetts, in particular. First, you can only go back three years with amended tax returns (as opposed the five to seven year assess-

EDWARD J. BERARDI, CPA, JD IS A SHAREHOLDER OF KIRKLAND, ALBRECHT & FREDRICKSON, LLC. 16

ment by New York and New Jersey) and secondly, Massachusetts may not be willing to rebate the taxes previously paid without a struggle. The additional tax to the company for failing to comply with the nexus rules can be as high as four to five times the original tax, due to the great cost of penalties and the double tax incurred for the years outside the three-year amended return window. In addition, the company on the hot seat will incur significant professional fees to prepare the prior years’ tax returns and represent to the company before the various taxing authorities. Compliance with nexus rules isn’t that difficult to achieve, once you’re aware of nexus regulations. Compliance occurs if you divide your company’s state income tax burden among the states where you have a presence, as opposed to 100 percent of the tax going to the resident state. The sole other tax cost to your company is the expense of filing additional tax returns, which generally is small dollars. So, how do business owners make their way through the quagmire of constantly changing state nexus rules to best determine where to file their state tax returns? The key is to maintain communication with your tax advisors, making sure that he/she is kept up to date on all the states where your company conducts business. The use of a nexus questionnaire can be extremely helpful, for it targets key nexus producing activities and assists the advisor in assessing nexus exposure in all states. This series of questions are comprehensive, running the gamut from queries about internet sales to states where your business handled complaints or picked up/replaced damaged products. The tax challenges can be many for family businesses that have grown to participate in interstate commerce, but by having timely discussions with a tax advisor, costly noncompliance issues can be avoided. n

FAST Communicating with Your Bank

t’s that time of year – time to submit your annual financial statements to your bank. It’s also a great time to incorporate some best practices into your banking communications for 2012. Submit your financial statements to the bank on time. If your statements must be compiled, audited or reviewed by an independent accountant, MARGERY L. PIERCEY make sure that you’ve scheduled their work with ample time to report timely to your banker. Now is a great to time to discuss with your independent accountant the timing of 2012 work. Explain performance anomalies. At this time last year, you likely shared with your banker 2011 financial

performance expectations. If you projected $500,000 of profit and you’ve come in at $100,000, your banker will want to know why. Dollarize the components of the profit shortfall and articulate them to the bank. Don’t wait for your banker to ask the question; consider meeting with him or her to present your financials and proactively provide the explanation for the profit shortfall. Communicate often in 2012. Incorporate into your monthly routine the preparation of a brief letter to the bank which discusses significant developments, the good and the bad. Not only will this enhance the bank’s understanding of your business and build confidence in your financial management, but it will provide discipline to the analysis of business performance each month. Increase controls. Fraud is on the rise. The impact of the recession-

ary economy from which we’ve emerged has had lasting effects on your employees. Mortgages may still be underwater, an employee’s spouse may still be unemployed, college tuitions and medical bills may have caught some unprepared. Unfortunately, even the most trusted employees can give into these personal pressures and be capable of stealing. Make sure controls are in place over inventory, cash and other assets. And keep your banker informed about improvements in controls – they’ll be pleased to hear about enhanced controls over the assets that serve as bank collateral. Talk succession with your banker. Owner, management and key employee succession are of critical interest to your bank. Keep them apprised of developments. n

MARGERY L. PIERCEY, CPA, IS A MEMBER OF THE FIRM AT WOLF & COMPANY, P.C.

26 years of being FORTUNE ® magazine’s “Most Admired…” It’s been an honor.

We are honored to be named FORTUNE ® magazine’s “World’s Most Admired” life insurance company. From our financial representatives who help clients achieve financial security to the Northwestern Mutual Foundation whose charitable donations help society at large, we are thankful to all who make everything we accomplish possible.

David C Mc Avoy Managing Partner The Boston Group (617) 742-6200 nmfn-thebostongroup.com 05-2779 © 2012 Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser, and member of FINRA and SIPC. David Charles Mc Avoy, General Agent(s) of NM. Managing Partners are not in legal partnership with each other, NM or its affiliates. David Charles Mc Avoy, Registered Representative(s) and Investment Adviser Representative(s) of NMIS. FORTUNE® magazine, March 21, 2011. 17

Family Business Estate and Gift Tax Strategies

By Thomas Astore

ederal estate and gift tax laws have been substantially revised for 2011 and 2012. Current estate and gift tax exemptions are at historically high levels but are scheduled to substantially decrease in 2013 unless Congress and the president act to retain or modify present law. Because of these uncertainties both estate T HOMAS A S TO R E and gift tax planning has assumed special importance for 2012. The changing landscape The federal estate, gift and generation skipping tax exemptions are set at $5.12 million for 2012 with a top estate tax rate of 35 percent. These exemptions reverted to $1 million on Jan. 1, 2013, with a top estate tax rate of 55 percent. The Massachusetts exemption has not changed, remaining at $1 million with a top rate of 16 percent. There is no gift tax in Massachusetts. In addition to these increased exemptions, current federal law allows for portability of a spouse’s unused estate and gift tax exemptions if that spouse dies in 2011 or 2012. In short, the portability provision allows married couples to transfer up to $10 million of assets owned at death free of federal estate tax with little or no planning although an election needs to be made on a timely filed estate tax return. This provision, which is new to estate tax law, is also set to expire at the end of 2012 (the president’s budget plan proposes to make this provision permanent). Massachusetts law does not include a portability provision therefore general trust planning (AB Trust planning – a credit shelter trust combined with a marital trust) may still be appropriate for Massachusetts residents. The effect of the portability provision is to simplify estate plans. For example, 18

a general estate plan may provide for a QTIP or marital trust and a credit shelter trust with the latter funded with sufficient assets to fully use the decedent’s federal exemption (so-called AB trust planning). With the portability provision this type of plan may be obsolete, at least for 2012, for many, but not all estate plans. Although the concept of portability appears to be a good one, it may not serve everyone’s needs, especially those with significant assets, as portability is not indexed

for inflation so the unused exemption on the first to die will not increase; the unused exemption could be lost through remarriage; asset appreciation in a credit shelter trust during the life time of the surviving spouse will not be subject to transfer tax; and the credit shelter trust can be used as an asset protection device to shield assets against the potential claim of creditors during the spouse’s lifetime. There have been numerous proposals in Congress over the past few years to both

increase and decrease the current exemptions and rates or even abolish the estate tax law. In fact, on Jan. 23, 2012, Rep. Huelskamp (R-Kansas) introduced the American Opportunity and Freedom Act of 2012 that includes provisions to abolish both the estate tax and the individual alternative minimum tax. For obvious reasons, this bill was a non-starter with Democrats. Because of the political gap existing between the parties it is unclear whether new rules will be enacted in the near future. Gifting as a strategy for business owners Many family business owners are reluctant to transfer control of their businesses or are concerned about how they will provide for their retirement needs. In addition, many ask, why gift now when I can leave my assets to the next generation posthumously? The key advantage of gifting assets currently is to freeze the value of the business owner’s estate so that future appreciation in such assets is passed to the next generation. Due to the uncertainty in the estate and gift law, historically high exemptions, low valuations and the absence of a Massachusetts gift tax, business owners should be speaking with their advisors now to begin a 2012 strategic gifting plan. Family business owners can take advantage of multiple gifting techniques that address their basic issues and assist them in meeting their estate and gifting goals. These techniques also enable business owners to substantially leverage their current gift tax exemption. Some examples include: Complete gifts: Outright gifts where the business owner gifts full legal title in assets to the next generation. This strategy does not address the control and retirement concerns of the business owner, so it may be more appropriate for assets other

than an operating business. Family limited partnership: The business owner transfers assets to a partnership or limited liability company in exchange for both voting and nonvoting interests. The owner then gifts the nonvoting interests to the next generation, taking advantage of lack of control and lack of marketability discounts to greatly leverage the use of the owner’s gift tax exemption. This technique works well with an operating business, real estate investments and marketable securities. Grantor retained annuity trust (GRAT): A GRAT is a technique that allows a taxpayer to transfer assets to the next generation while maintaining a stream of cash flow with minimal gift tax exposure. With a GRAT, the business owner transfers assets to a trust (generally assets he believes will substantially appreciate during the term of the GRAT) in return for annuity payments from the trust during its term – usually two years (there have been Congressional proposals to set a minimum 10year GRAT term, which may make GRATs less advantageous). The owner pays gift tax on the remainder interest in the property. The advantage of the GRAT is that if the underlying assets grow at a rate greater than the mandated IRS discount rate when created this additional appreciation passes “free of gift tax” to the trust beneficiaries. Intentionally defective irrevocable trust (IDIT): An IDIT combined with an installment note is another gifting technique that has gained popularity over the past few years. With an IDIT, the business owner transfers his closely-held business stock to a trust for an installment note. If properly structured, the transfer removes future appreciation in the business asset from the owner’s estate while converting the business into a fixed yield non appreciating asset. The IDIT transaction has no effect for income tax purposes, so the business owner continues to recognize income from the business. For this technique to

work, the underlying business must generate sufficient cash to repay the note plus interest. Similar to the GRAT, the IDIT results in significant gift and estate tax savings if the underlying assets produce net income and appreciation that exceeds the installment note payments. Conclusion Because of the uncertainties in estate law, including higher exemptions and the portability provision, it is critical for business owners to review their estate plans to determine if such are compatible with current law. n THOMAS H. ASTORE, CPA, IS PARTNER IN THE FIRM RODMAN AND RODMAN, P.C.

From The Board Continued from page 4

every entrepreneurial and family-owned business household in the commonwealth. Our message celebrates the personal business and its wonderful contributions to the state and country. The truth is in the numbers. The trends we have seen and the growth within our organization and family businesses as a whole has been amazing. I can only hope that more family businesses, partners and supporters join this movement. At the FBA, we are driven by our desire to honor businesses and to provide them with the resources they need to excel. We look forward to continuing to be part of this. It is truly an honor and privilege to look at these numbers and know that we have been, if even in just a small measure, a part of their continued success. To take advantage of all the FBA offers or to support the continued success of the family owned businesses as a sponsor of the Family Business Association, visit us online at www.fbaedu.com. We will be honored to count you among our numbers. n 19

Three Tax Strategies Offer Silver Lining in Today’s Economy By Kurt R. Steinkrauss, Esq., and Laurie J. Austin, CPA

s business advisors, we try to focus on the positive. Even though the value of your business may be down at the moment, this is actually an ideal time to implement some tax and succession planning. Depending on one’s personal goals and specific business, real tax-saving opportuniKURT R . ST E INKR A U S S ties may be available to business owners who take advantage of proper planning. Leverage the exemption Congress recently enacted a $5 million exemption for estate, gift and generation-skipping transfer (GST) taxes (before 2011, the gift tax exemption was $1 million, while the estate and GST tax exemptions were $5 million). Consider a couple who owns a business and plans to pass ownership to their two children. Together, they can now gift assets worth up to $10 million. If they make a gift to a proper type of trust, the couple can also allocate their GST tax exemptions to that trust, meaning that the assets in the trust can pass to their grandchildren without incurring an additional tax. The exemptions are now “unified,” meaning that one can only gift assets during life or leave assets at death totaling $5 million without incurring a federal gift or estate tax, but $5 million can go a long way today. As noted above, because most business values are lower than previous years, owners can also gift more of the business with-

L AU R IE J. A U S T I N

out exceeding the exemption limit. For example, let’s imagine that a business is now worth $5 million, while it had been worth $10 million previously. Before, the owner could only have gifted 50 percent of the business without exceeding the $5 million exemption, while now the owner could gift the entire business without incurring a gift tax. Assuming a business owner is transferring a minority interest of the business, he or she may also be able to discount the value of the shares. The IRS has long accepted – albeit, begrudgingly – that minority shares are worth less than majority shares, because the minority shareholder cannot control the business and there is no market for the sale of minority shares. Minority shares may be discounted by 30 percent or more. Gift now rather than later Some business owners may avoid gifting, choosing instead to leave assets at death. There are compelling reasons, however, to consider making a gift during life rather than waiting and leaving assets at death: • Massachusetts has an effective estate tax of approximately 10 percent, but

KURT R. STEINKRAUSS IS A PARTNER WITH THE LAW FIRM OF MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. LAURIE J. AUSTIN IS A PARTNER IN THE PRIVATE CLIENTS GROUP AT DICICCO, GULMAN & COMPANY LLP 20

no gift tax, so gifting now may minimize or even eliminate state estate taxes at death. • Future appreciation of the gifted assets will take place outside of the estate. • The estate tax exemption may decrease and the estate tax rate may increase in the future. Unless Congress takes action, the estate and gift tax exemption will decrease to $1 million in 2013. • Benefiting one’s heirs while still alive may be more rewarding, as getting them involved may encourage them to grow into their roles as business owners. There are a few disadvantages to making a gift now, however, including: • When one gifts an asset, the beneficiaries receive the asset’s “carryover” basis, meaning they will take the asset with the prior tax basis which can result in capital gains upon the sale of the asset. Conversely, assets transferred at death are “stepped up” to the fair market value, which avoids the capital gains tax on the appreciation in value prior to death. • If the value of the gifted assets decreases, the donor may have wasted a portion of his or her exemption.

Set up a trust One other disadvantage to gifting an asset during life is that by gifting the asset, the business owner gives up the income that it can provide. In today’s economy, many owners still depend on income from their business. In addition, the owners may also be reluctant to give up control of the business to children who are not ready to run it. With proper planning, however, trusts can be used to address these and other issues. For example, the trust can be structured to provide the parents with some or all of the income of the trust and control over the business, yet still benefit their children (and other descendants). The trust can also provide the beneficiaries with creditor, divorce and litigation protection. One type of trust that a business owner may want to consider creating is one in which the business owner sells or loans business shares to a trust for the benefit of family members in exchange for a note with a minimal rate of interest. Under this “estate freeze” technique, the owner can maintain the current value of the business (plus minimal interest), while removing the future appreciation from his or her taxable estate. For this technique to succeed, transferred shares must appreciate in value by a greater percentage than the interest rate charged. Minimum interest rates set by the IRS, however, are at historic lows. As of February 2012, minimum rates were just 0.19 percent for loans of less than three years, 1.12 percent for loans of three to nine years and 2.58 percent for longer loans. It is anticipated that interest rates will begin to rise. The trust can be structured so that a sale of assets does not trigger any income taxes. In order to obtain this benefit, the transferor must pay all the income taxes of the trust. At the end of the loan term, appreciation in excess of the interest rate remains in the trust to benefit family members. Another option for business owners to consider is the creation of a Grantor Retained Annuity Trust (GRAT). Under a GRAT, the owner transfers assets to the trust and, in return, receives annual annuity

payments equal to the value of the transferred assets (plus minimal interest), typically for two to five years. When the payments end, the beneficiaries (or trusts for their benefit) receive the remaining assets free of estate and gift taxes. The minimum interest rate for GRATs is just 1.4 percent in November. In order for this technique to

succeed, the transferor must survive the full term of the annuity to realize tax benefits, and cannot allocate his or her GST exemption to the gift. Values, taxes and interest rates are all bound to increase. Take advantage of today’s tax-saving opportunities with a smart succession planning strategy. n

Building Family Trust for Generations For almost 150 years, generation after generation of New England’s family businesses have turned to Hemenway & Barnes for trusted advice about complex estate, tax and succession issues, charitable planning, and more. Our clients turn to us to help protect and preserve their assets, to ensure the well-being of their families and to distribute assets in accordance with immediate and long-term needs and goals. Meeting the challenges of sustainable family prosperity and unity requires great thought, care and planning. Whatever the challenge, families trust Hemenway & Barnes to help them find solutions.

Estate and Tax Planning | Professional Trustee Services Trust and Estate Administration | Charitable Planning Retirement Planning | Family Business | Family Office

Trustees l Counselors at Law

www.hembar.com

www.hemtrust.com

New Alimony Law Can Ease Retirement Options for Business Owners

By Phyllis Federico and William H. Schmidt

s the head of your family business delaying retirement because of alimony obligations to a former spouse? The Alimony Reform Act of 2011, which became effective on March 1, 2012, may provide some relief. The new law provides for the potential to change existing alimony obligations established either by a judgment (decision made by a judge after a trial), or a separation agreement, which permits modification, often referred to as a “merged agreement.” The new law does not provide any relief for alimony paid pursuant to an agreement that is not modifiable. Among the changes made by the new law are limits on the duration of alimony; suspension, termination or reduction of alimony upon cohabitation; and cessation of alimony upon reaching Social Security retirement age. The following table describes the new duration limits:

LENGTH OF MARRIAGE

economic partnership. The court has the discretion to extend an alimony termination date for good cause shown. As of the publication date of this article, it is too soon to discern how judges will deal with their discretion to deviate from the limits on duration of alimony. The new law provides that alimony can be suspended, reduced or terminated if the spouse receiving the alimony has maintained a common household with another person for a continuous period of at least three months. Persons are deemed to maintain a common household when they share a primary residence together with or without others. The new law provides a number of factors that are to be taken into account to establish whether a common household is being maintained. If alimony is suspended due to cohabitation, it may be reinstated upon the termination of the cohabitation. The reinstated alimony may not extend beyond the duration limits. In addition to the limits on the duration of alimony described above, the new law now provides that alimony will end when the payor reaches Social Security

MAXIMUM LENGTH OF ALIMONY

5 years or fewer years

50 percent of the length of the marriage

More than 5 years but no more than 10 years

60 percent of the length of the marriage

More than 10 years but no more than 15 years 70 percent of the length of the marriage More than 15 years but no more than 20 years 80 percent of the length of the marriage More than 20 years The length of the marriage is the number of months from the date of the marriage to the date the divorce complaint is served. A judge can increase the length of the marriage if the couple lived together prior to the marriage and maintained an

No Maximum full retirement age (now age 66 for most payors). The alimony payor does not need to retire in order to take advantage of this provision. However, the court may set a different alimony termination date in certain circumstances.

PHYLLIS FEDERICO IS A DIVORCE ATTORNEY AT THE BOSTON LAW FIRM OF SCHMIDT & FEDERICO, P.C. WILLIAM H. SCHMIDT IS AN ESTATE PLANNING AND DIVORCE LAWYER AT SCHMIDT & FEDERICO, P.C. 22

If the alimony obligation that is keeping the head of your family business from retiring extends beyond the duration limits described above, or if that person has reached or is near the Social Security retirement age, he or she may take advantage of the provisions in the new law by filing a complaint for modification in the Probate and Family Court. The modification is limited to the term of alimony and not the amount. A modification of the amount may only be permitted if there are other substantial changes in circumstances that might warrant such a change. Administratively, the new law provides for certain delays to phase in the modification process in the case where the duration limits are exceeded – these delays do not apply in the case of cohabitation. Payors who were married for five or fewer years may file a modification on or after March 1, 2013. Payors who were married for 10 or fewer years, but for more than five years, may file a modification on or after March 1, 2014. Payors who were married for 15 or fewer years, but for more than 10 years, may file for a modification on or after March 1, 2014. Payors who were married for 20 or fewer years, but for more than 15 years, may file for a modification on or after Sept. 1, 2014. Any payor who has reached full Social Security retirement age or will reach it before March 1, 2015, may file a complaint for modification on or after March 1, 2013. Any change, even one for the better, is always accompanied by uncertainty. If you are uncertain whether the head of your family business may be entitled to relief under this new law, he or she should contact his or her attorney to further discuss this matter. n

Homeowner marketing Lists Aim for success And ConneCt with the Best! make tHe most of your marketing campaigns witH targeted Homeowner marketing Lists reacH tHe rigHt prospects today! Whether you are micro-targeting a specific neighborhood or want to reach a vast audience across multiple states, put your valuable offer directly in front of the right prospects with a Homeowner Marketing List from The Warren Group. For decades businesses have depended on The Warren Group to identify new revenue opportunities with the most accurate and detailed information available. We work closely with our clients to understand their goals and select the best prospects from our comprehensive database. Email us today to put your marketing efforts on target! Aim for success and connect with the best with Homeowner Marketing Lists from The Warren Group.

Call 617-896-5392 and speak with an Account Manager or email datasolutions@thewarrengroup.com

customize your Homeowner Lists By: •

Demographics

•

Loan/Sale History

•

Property Value

•

Equity Percentage

•

Year Built

•

Amenities

•

Heating Type

•

Lot Size

•

And more….

Provided by