Retirement is an event that often triggers one’s desire to review his estate plan. Even if you’re
are not ready for a full-scale review, retirement may directly affect certain elements of your
estate plan and require that those be looked at in light of the changed circumstances.
Review existing arrangements for disposition of the business interest.
1. If you are self-employed or is a partner or a shareholder of a closely-held business, review the
arrangements that have been made for transferring ownership interest in the business.
2. Restrictions may be imposed on transfer of the business interest.
1. Examine the partnership agreement, shareholders’ agreement, buy-sell agreement, the
corporation’s organizational documents, or other relevant documents and note all provisions
that affect your ability to retain or transfer ownership as you desire.
2. Are there agreements that restrict the transfer of your ownership interests, or that require that
they be transferred to the other owners, to the partnership or corporation, or to someone else?
3. Is your client required to transfer ownership upon his retirement?
3. Review disposition of the business interest under client’s existing estate plan.
1. Discuss how the business interests will be disposed of under his existing estate plan, and
whether the existing plan is consistent with your client’s desires and good tax planning.
2. Examine your will, trust instruments, agreements for the disposition of the business interests,
and other relevant documents.
3. Analyze the estate, gift, and income tax consequences of the existing plan.
4. Estimate the value of your interest in the business, and project what that value will be on various
assumed dates of death.
5. Compute what the tax liabilities would be under the existing plan, making various assumptions.
4. i. For example, your client dies the day after retirement, five years later, 20 years later, etc.
If the present plan has your retaining the business interest, make reasonable assumptions
regarding what your heirs will do with it. For example, if your heirs are likely to sell it immediately
following his death, take into account the step-up or step-down in basis they will receive
5. Consider alternative arrangements for disposition of the business interest.
1. Go over alternative ways of disposing of your client’s business interests, which may better meet
his objectives and/or reduce the overall tax burden.
2. Retaining the business interest may be desirable if:
1. You want to retain control or to continue receiving income from the business.
2. There are restrictions on your ability to transfer the interest a desired.
3. Will the interest will qualify for the marital deduction.
4. Will the estate will be sheltered from tax by the unified credit.
5. The only acceptable alternative ways of disposing of the interest would result in gift taxes as
great, or nearly as great as the projected estate tax. This could be the case especially where the
business isn’t expected to appreciate in value between the date of the gift and the assumed
date of death, or where the rules would apply to result in imposition of a gift tax on an amount in
excess of the actual fair market value of the business interest.
3. Gifting the business interest may be desirable tax-wise if:
1. It can be done in such a way as to maximize the annual gift tax exclusion for present interest
gifts.
2. It is likely that the interest is going to appreciate substantially, so that the value at which it would
be included in your estate would be much greater if it weren’t gifted.
4. The following methods of disposing of the business interest may be preferable to gifts
(whether outright or in trust) or testamentary disposition:
1. Selling the interest to those who would otherwise inherit it, particularly on an installment sale
basis.
2. If the business is a corporation, having a redemption of your stock
3. If the business is a partnership or limited liability company, having your interest liquidated
4. If the business is a corporation, causing a recapitalization of the corporation, with the result that
you retain a class of stock providing a current income, while the stock which is entitled to
appreciation in the value of the business is transferred to others.
5. However, be careful of running afoul of the rules, which can result in a taxable gift in an
amount greater than the actual fair market value of the transferred interests.
6. If the business is a partnership or limited liability company (LLC), causing an amendment of the
partnership or operating agreement, with the result that your interest receives relatively more of
the current income of the business and relatively less, or none, of the potential appreciation.
7. However, make sure that any reallocations are respected under the “substantial economic
effect” rules
8. If the business is a corporation, creating a holding company structure by contributing the stock
of the business to a new corporation which is capitalized with two classes of stock; you would
wind up with the class providing greater current income and less of an interest in the potential
appreciation.
9. This technique achieves many of the same objectives as a recapitalization and is useful when a
recapitalization isn’t possible, e.g. because minority shareholders refuse to go along with it. As
with a recapitalization