Exit Planning Tools for Business Owners

Exit Strategies

Utilizing a NING Trust as Part of a Business Exit Strategy

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Signing Trust DocumentsThe most commonly stated goals of an exit plan for a business owner are to exit their business on their terms, to receive the highest possible value (or their desired value), and to do so in the most tax efficient manner. It takes time to implement the process to accommodate those objectives. When a business owner rushes to sell their business many things can be overlooked including how to set up the exiting transaction in a way that minimizes taxation.

Particularly in California, state income taxes are excessive in relation to other states, especially compared to states that don’t have any income taxes. For 2020, the top tax bracket for California is 12.3%. Upon the sale of a valuable business, the realized gains can be substantial enough to hit this top tax bracket, especially if the business has a low cost basis. To put it into perspective; if a company is sold, realizing taxable proceeds of $12,000,000.00, the potential taxation in the state of California is approximately $1,476,000.00. That’s a significant amount but, if planned carefully, this potential taxation can be avoided.

Though it is not the only solution for a California business owner, a NING Trust (Nevada Incomplete Gift Non-Grantor Trust) is a tactic that be utilized to avoid California income taxes, if the right conditions are met.

What is a NING Trust?

A Nevada Incomplete Gift Non-Grantor Trust is an irrevocable trust designed to reduce or eliminate the potential State income tax for high income earners or on a significant capital gains on a sale of an asset, and the owner lives in a high income tax state. An irrevocable trust is often a trust to which the assets placed in it are no longer owned by the Grantor (Owner). Therefore, it has a third party trustee, and the trust and the assets in it are considered to be outside of the Grantor’s estate. However, because the NING trust is considered to be trust with an “incomplete” transfer status, it is still in the owner’s estate, but we will get into the benefits of that later. Because it is a Non-Grantor trust, the trust is the entity that pays the income taxes and not the Grantor, or owner of the assets. Because Nevada does not have a state income tax, a resident or a trust in Nevada would not owe income taxes.

A NING Trust is created under Nevada state laws. It is considered to be a “self-settled” trust, which means you are the creator and primary beneficiary of the trust. The NING trust would be utilized if you have a desire to receive distributions from this trust. Furthermore, you could benefit from a “self-settled” asset protection statue of this trust, which the state of Nevada recognizes. Although Nevada isn’t the only state to recognize this statute, Nevada is a very trust friendly state and is convenient for California business owners, which we’ll get into in a moment.

Estate Planning with a NING Trust

For estate planning purposes, it is important to realize that asset transfers into a NING trust is considered to be an “incomplete gift”. Because of this, the assets in a NING trust will be included in the asset owner’s estate and will receive a step up in costs basis at death, if the low cost basis assets are still existing in the trust. But, you will have the benefit of transferring assets into the trust and not be subject to gift taxes. Furthermore, keep in mind, that the NING trust is for income tax strategy purposes and not for estate planning to reduce an estate tax liability.
So here’s the catch. In order to take advantage of a NING trust, the business owner residing in California that is looking to sell their business should first purchase a home in Nevada or another state without income taxes and establish residence there. You will need to definitely work with a business transaction attorney or an estate planning attorney that is well versed in NING trusts.

Later, the shares of the corporation are placed into the NING trust (after it is established), which then the shares of the corporation are then sold to the buyer. The business owner, now a resident of Nevada, can eventually begin to take distributions from the NING trust. You will need to work with a C.P.A. or tax attorney, but some say that after a year or so after the sale, the Grantor can begin to take distributions from the trust.

NING trusts can only own intangible assets, so shares of a corporation or an investment account. But that is okay in this instance, because the shares are sold and then placed into an investment portfolio to continue to grow.

Maintaining Non-Grantor Status

In order for the trust to maintain a Non-Grantor status or not violate the Grantor trust rules (which would make distributions taxable), the Grantor needs to exercise Powers of Appointment or Non-General Powers of Appointment. This means you retain the power to appoint anyone in the world except yourself, your estate, or creditors of your estate. For this discussion, we will refer to the “Inter Vivos Powers of appointment”, or powers during life. In this situation, distributions must be facilitated by a committee of adverse appointees. Second, the distributions need to be made in a non-fiduciary capacity and based on HEMS (Health, Education, Maintenance, and Support). Adverse committee members may include siblings, children, or other relatives that may be beneficiaries. There are many more nuances to these rules, which we won’t get into for sake of time. Besides, an expert attorney will explain all you need to know.

The bottom line is, this trust has a lot of rules and must be carefully written and set up. But it is feasible.

To Summarize, the trust needs to:
1. Be self-settled to give the grantor the ability to receive distributions.
2. Be a non-grantor trust so that the grantor won’t be taxed on the trust income at the rates of their home state.
3. Ensure the grantor be given a non-general power of appointment to direct disposition of the trust.
4. Furthermore, the transfer of the business to the trust would have to be an incomplete gift, includible in the grantor’s estate at their death.
(source: Save State Income Taxes Using a Nevada Incomplete Gift Non-Grantor Trust; Steven J. Oshins, Esq., AEP & Brian J. Simmons, CFP)

There are other solutions other than a NING trust to accommodate a business exit planning strategy. It all depends on the business owner’s situation, and what state they live in or operate the business in.

If you are interested in learning more about these tactics, or would like to see what solution is best for your exit planning needs, feel free to contact me by email: szeller@zellerkern.com.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com

The Coaching Skill in Exit Planning

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The single most important talent in your exit planning team is coaching skill. I’ve written often in this space about the need for multiple talents, from taxation to legal, financial planning, and risk management. None, however, is more important than coaching.

Let me put it this way. Your planning team can be led from any position, as long as the person leading has coaching skill. If he or she doesn’t, all the clever tax advice or ironclad documentation in the world won’t lead to your successful transition. But if the person leading the team is an experienced coach, you’ll probably be okay.

What is Coaching Skill?

Let’s make it simple. Coaching is asking questions. An experienced coach will ask the questions that no one else does, preferably in a way that doesn’t offend.

Do you want to save money on taxes? Of course, and that should be apparent to every professional involved. Do you want to maintain control until you are paid what the company is worth? Sure. Do you want to ensure that your family is taken care of? Naturally.

These aren’t the questions that derail a transition plan. Here are a few that, left unasked, will.

Is there something more important to you than the proceeds from selling? Is there a part of your legacy that must be preserved if at all possible? Are there non-financial or non-equity stakeholders whose welfare must figure into the plan? Is your family on board with this?

These are the questions that an advisor who is focused on the technical complexities of exiting will often omit.

The Most Important Question

What will you do when you no longer own this business?

For many entrepreneurs, that’s the stumper. Unless you can answer it comfortably, your plan is very likely to fail. Most advisors will ask it in a casual way. “So what will you do next?” They may react little or not at all if your response is “I don’t know.”

When I was active as a business broker, I would decline a listing if an owner couldn’t enunciate a plan for life after the business. In my first book, 11 Things You Absolutely Need to Know about Selling Your Business, I describe a case where an owner declined two offers, each for twice his company’s estimated value. He simply didn’t know what he would do next.

“I don’t know” is a signal that the owner can’t envision life without the activity of the business.

Sometimes the answer is too facile. “I’ll play a lot more golf!” Nice try, but I’ve heard many a retiring owner tell me “I never thought I could play too much golf.” Here is an exercise I use with clients to help them visualize the next phase of their lives.

Filling in the Week

Start with the time you currently spend at the business. Include that “quiet time” at the beginning or end of the day when you like to think. Add in answering emails and texts at home or reading reports and articles on the weekend. Let’s say, conservatively, that you are engaged with your business for 50 hours a week.

Now, let’s start retirement with golf every Monday, Wednesday, and Friday. That’s a lot of golf, but we have only consumed about 15 hours of your workweek. What else?

Many folks will say they want to do more community service. Unless you plan to take on the full-time responsibility of running a charitable organization, let’s try simple volunteering to start. Two half-days a week? That’s another ten hours. We are up to twenty-five.

Travel is a big goal. How do four, two-week trips a year sound? That’s an average of another 8 hours a week.

Now you have two months of traveling, 150 golf outings, and 100 days a year working for charity. That only leaves you with about 17 hours a week to fill. Sleep in, exercise more, catch up on your reading?

There are lots of ways to fill the remaining time, but remember we are starting with someone who has a lot of plans. Many business owners have none.

Unhappy Exits

According to a survey by the Exit Planning Institute, up to 75% of former business owners are unhappy with their exits one year after selling.

I don’t know of any of my clients who are unhappy with the results. Perhaps that’s just luck, but I like to think it’s at least partially due to my coaching skill. The technical and financial complexities of a successful transition are nothing to sneeze at, but helping an owner be prepared is so much more than that.
Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Wealth Management for Business Owners

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businessman watering money to signify growth

Wealth Management Considerations for Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business, into your overall plan for managing your wealth.

 

Key Elements of Exit Planning

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

  • Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?
  • Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.
  • A financial needs and gap analysis with an accurate valuation (not back of the envelope – meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?
  • Personal risk management including asset protection, insurance planning, tax planning.
  • A current estate plan — a business owner cannot do exit planning without doing estate planning.
  • A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.
  • An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Business Succession Planning Is There Life After Death?

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Consider this scenario: You’re part owner of a thriving small- to medium-sized business. You handle certain key responsibilities and rely on your partner to handle others. While your partner is away on business, the phone rings. The shaky voice at the other end of the line informs you that your partner has been fatally injured in a car accident. You’re grief-stricken. At the same time, you realize many people—you, your family, your partner’s family, your employees, customers, and creditors—depend on the uninterrupted continuation of your business. You know you should have planned for this. . .but you just never found the time.

What If I Wait?

<man at cemetery with rosesIs this a situation you secretly dread the possibility of facing because you’ve never “found time” for business succession planning? Once tragedy strikes, it can be the worst time to deal with these issues. Under some circumstances, it may be too late. Consider the following potential risks you could face without a proper business succession plan in place.

An owner’s unexpected death may jeopardize the long-term viability of a company, whether it is a sole proprietorship, partnership, or corporation. For instance, loans may be called, or work in progress may be put on hold until a replacement can be hired. In the meantime, customers may gravitate to your competition, making it difficult to win them back.

Moreover, once a business is in crisis, selling a deceased owner’s interest may result in the surviving spouse or family members settling for a price that is less than fair market value (FMV). Since stock or partnership interests in a closely-held business are not publicly traded, their value is not established without a business succession plan.

Finally, although a deceased owner’s estate plan may have made sense for his or her estate, it could spell disaster for the business. For example, if the company is an S corporation, and the trustees of a family trust become stockholders in the business, an inadvertent termination of the S corporation election may result if the trust does not qualify.

Secure Your Future

A business succession plan helps reassure all parties the business will continue to operate. It establishes a monetary value for each owner’s business interest before the need arises. It also helps prevent problems by coordinating each owner’s estate plan with the business. One of the key components of a business succession plan is a buy-sell agreement.

A buy-sell agreement is a contract that creates a market for a deceased owner’s business interest. It obligates the owner’s estate to sell his or her shares for a predetermined price to partners or shareholders (a cross-purchase agreement); to the business itself (an entity agreement); or to both (a hybrid, or “wait and see” agreement).

Life insurance is commonly used to help fund buy-sell agreements. It provides tax-free money at the owner’s death, and can also help fund a buyout at retirement or in the event of a disability. Points to consider in choosing a policy include the size of the death benefit; the flexibility to change the death benefit as the business’s valuation changes; and the size of the cash value component. Also of importance are the policy’s ownership, beneficiary designations, and endorsements.

Smart Moves Help Beat the Odds

Relatively few closely-held businesses pass to the next generation. A demanding schedule may lead to procrastination. However, with so much riding on a proper business succession plan, investing the time to prepare one now—and to review it periodically—may be one of the smartest business moves you’ll ever make.

Keep in mind you’ll need qualified legal, financial, and insurance assistance in establishing your buy-sell agreement.

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

Are You Prepared for the Next Stage of Your Business?

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You’re a successful business owner who’s devoted all your time and effort to growing your company to be a best-in-class provider in the industry. With your head down so long, you’ve probably never thought about what you were going to do as you approached the next stage of life.

man clasping handsPlanning for that next stage before you actually get there can help solve many of the problems today’s business owners often face following an exit transaction. It may sound great to play golf every day, or to sit at the lake and fish, but does that replace the daily rush you had while operating your business?

In the most recent State of Owner Readiness Survey conducted by the Exit Planning Institute, 75% of business owners were dissatisfied with the result of their exit transition, post-transaction.[1] While several factors can contribute to this dissatisfaction, developing a plan – and adjusting that plan based on what drives you emotionally – may help you from becoming one of the statistics. As Churchill once said, “Plans are of little importance, but planning is essential.”

Many owners think about what’s best for today but aren’t necessarily considering unforeseen situations. And planning for the unforeseen can be what helps transition a business successfully. No one wants to contemplate what might happen to the business if you’re suddenly incapable of running it, and you most likely have key man life insurance that can help cover certain things, but do you have someone in the house who can step in and keep the business afloat in your absence?. Having such a plan in place, and making sure everyone involved in the plan is on board, could help your business continue to be successful during a transition period.

Developing that type of plan also presents your company as more valuable, since it’s not viewed as being solely reliant on one person to run the operation.

After all those years of working to build a respected business, you want to be able to recoup the most value out of your efforts. With a little planning, you just may be able to set yourself up for a better than expected payday in the future.

[1] 2013 “State of Owner Readiness” Survey

This article was first published on the Schneider Downs blog “Our Thoughts On.” John Kohler, CPA, CEPA has more than 15 years of experience in assisting clients in a variety of tax and accounting functions across numerous industries. He actively assists clients with business succession opportunities, helping them identify options for successful ownership transitions to families, third parties, and strategic partners. Complete an Exit Readiness Assessment for yourself.