Spring 2014 issue of Horizons

CONSTRUCTION

corporate stock that makes up 35% or more of their adjusted gross estate.

plays an important role in selecting a successor. Another important quality is the successor’s desire. Even though the employer may have big, bright plans for an employee, the chosen successor may not want them. Employers should find out what motivates the successors and work to help them achieve their own career ambitions. Attaining these ambitions comes from giving them adequate training and development, necessary leadership experience and quality mentorship. Transfer Ownership The next and most complex step is to decide how to transfer ownership. Contributing to the complexity is the multitude of ways ownership can be transferred.

Therefore, this is a good option for families for which a corporation constitutes the majority of the family’s wealth. Under this code section, a corporation may redeem its stock from the estate on a tax-favored basis in an amount equal to the decedent’s estate taxes and administrative expenses.

In many instances, the redemption may be part of a buy/sell agreement.

Buy/Sell Agreements Buy/sell agreements are also an effective method to transfer ownership. With a buy/sell agreement, the price of the stock is based on a predetermined valuation. Therefore, with this approach, the agreed stock price is an important component and should be reviewed annually. Employee Stock Ownership Plans An ESOP is another succession planning opportunity that requires annual valuations. An employee stock ownership plan, or ESOP, allows owners to sell up to 100% of their stock to a defined contribution plan that is owned by its own employees. Therefore, the employees of the business become shareholders in the company. Stock Recapitalization Another choice is stock recapitalization. Both common and preferred stock can be recapitalized, but the benefits of each vary. Common stock recapitalization enables a shift in voting power to successors who will operate the company. Preferred stock recapitalization can shift future increases in corporate value to those who own common stock and freeze the value of the estate of a principal stockholder, so the subsequent increases in value go to the common stock held by their predecessors. As you can see, this option provides a lot of flexibility for estate planning.

The options include, but are not limited to:

∙ Gifting stock

∙ Section 303 stock redemptions

∙ Buy/sell agreements

∙ Employee stock ownership plans

∙ Stock recapitalization

Gifting Stock Gifting stock is an effective way of passing stock to successor individuals and in turn, reducing the estate of the original stock owner. And while gifting stock can seem self- explanatory, many considerations need to be taken into account. These considerations include the annual gift exclusion, future appreciation of the stock, and voting versus non-voting stock. Section 303 Stock Redemptions An alternative to gifting is a stock redemption. To qualify for a Section 303 stock redemption, the deceased must have

page 64 | horizons Spring 2014