Strategic wealth management for entrepreneurs and business ... · ... 25 Step 4: Consider “next ... into the wealth management implications of starting a business venture, ... wealth

Volume 3 | Transitioning the business to family members

Strategic wealth management for entrepreneurs and business owners

Wealth and Investment Management

Who should be on the business succession advisory team, and what specific roles do they play in assisting

a business owner? pg. 7

What are some of the typical ownership, family, economic, and management barriers to business succession planning? pg. 10

What techniques or methodologies can be used by a business owner to overcome these barriers? pg. 12

How conducive is the current tax landscape toward business succession planning? pg. 21

How might trusts be used to assist a business owner with estate and succession planning? pg. 23

What should a business owner consider at this juncture in his or her business’ life cycle? pg. 27

ContentsIntroduction .................................................................................................................... 2

About this volume ......................................................................................................... 4

Step 1: Select a business succession advisory team .............................................. 5

The advisory team: Composition and roles ........................................................................................7

Step 2: Analyze the potential barriers to succession planning ............................. 9

Typical ownership barriers to business succession planning........................................................ 11

Overcoming ownership barriers ..........................................................................................................12

Typical family barriers to business succession planning................................................................ 13

Overcoming family barriers .................................................................................................................. 14

Economic barriers to business succession planning ....................................................................... 15

Overcoming economic barriers ........................................................................................................... 16

Management barriers to business succession planning ................................................................ 17

Overcoming management barriers .................................................................................................... 18

Step 3: Review your trust and estate planning needs .........................................20

Support from the tax code ...................................................................................................................21

State tax considerations .......................................................................................................................22

The role of trusts in estate and succession planning .....................................................................23

Using a corporate trustee .....................................................................................................................24

Implementing trusts prior to a business’ appreciation ...................................................................25

Step 4: Consider “next steps” ................................................................................... 26

Preparation for the post-transition phase .........................................................................................27

Conclusion ....................................................................................................................30

“ Those who have earned a fortune are usually more careful of it than those who have inherited one.”

Charles Caleb Colton

Strategic wealth management for entrepreneurs and business owners | Volume 3: Transitioning the business to family members | 2

“Those who have earned a fortune are usually more careful of it than those who have

inherited one.” – Charles Caleb Colton

Perspective – a business legacyAlthough many business owners recognize the inherent challenges associated with forming and

growing a successful business, few of them appreciate how difficult it can be to successfully

transition such a business to their children or loved ones in a manner that provides the enterprise

with a reasonable chance of enduring beyond their lifetimes.

The true complexity associated with such an undertaking is underscored by the fact that less than

one in three family businesses remains viable beyond a single generation and only one in ten continues

to exist beyond two.1

Challenge and opportunity – a path to tomorrowTo that end, this document – Strategic wealth management for entrepreneurs and business owners

(Volume 3: Transitioning the business to family members) – serves to highlight many of the primary

planning hurdles and potential opportunities that business owners, their families, and their employees

should be made aware of within the context of multigenerational business succession.

Holistic wealth management – the Barclays approachFrom a wealth management perspective, we at Barclays understand that an entrepreneur’s success

in creating wealth is measured primarily in his or her ability to protect and convey it. Further, we

appreciate the need to carefully consider the unique confluence of stakeholder interests that arise

within the context of a family business.

Ultimately, by providing insight when required and guidance when requested, we seek to assist business

owners in developing customized solutions that address their particular wealth management needs.

We look forward to working with you and your family as you transition your business.

Christopher Johnson

Head of Wealth Advisory and Strategic Solutions, Americas

1. Source: Beckhard, R., and Dyer, W.G. (1983a), “Managing Change in the Family Firm-Issues and Strategies”, Sloan Management Review.

3

Six-volume series: Strategic wealth management for entrepreneurs and business owners

Wealth and Investment ManagementWealth and Investment Management



Volume 3 | Transitioning the businessto family members



Volume 2 | Growing a business


Volume 5 | Pre-Sale planning



Volume 6 | Post-Exit considerations



Volume 1 | Forming a business


Volume 4 | Pre-IPO planning


About this volumeThe “transition phase” of a company’s strategic life cycle follows its formation2 and growth3 phases

and is normally characterized by an entrepreneur’s preparations in anticipation of exiting his or her

business venture. Generally speaking, there are three primary transition methods:

> Transitioning the business to family members (often the entrepreneur’s children)

> Embarking upon an initial public offering (“IPO”)

> Selling the business

Although pre-IPO and pre-sale planning are analyzed elsewhere within this series,4 this document

focuses upon the challenges and opportunities associated with intergenerational succession planning

for closely held family businesses.

Within the context of wealth management, the key strategic elements that require consideration

when transitioning a company to family members include:

> Assembling a “business succession” advisory team

> Analyzing the potential barriers to succession planning

> Reviewing trust and estate planning needs

> Considering “next steps”

Each of these elements will be addressed in turn.

Figure 1: Strategic life cycle of business ownership

What do I need to consider as I form

my business?

VOLUME 1

Formation phase

What do I need to consider as I grow

my business?

VOLUME 2

Growth phase

What do I need to consider after exiting

my business?

VOLUME 6

Post-Exitconsiderations

What do I need to consider as I transition my business?

VOLUME 3

Transitioning to family members

or

VOLUME 4

Pre-IPO planningor

VOLUME 5

Pre-Sale planning

2. For additional insight into the wealth management implications of starting a business venture, see Strategic wealth management for entrepreneurs and business owners (Volume 1: Forming a business).

3. For details regarding the strategic wealth management plans most suitable to entrepreneurs nurturing a business endeavor, see Strategic wealth management for entrepreneurs and business owners (Volume 2: Growing a business).

4. See Strategic wealth management for entrepreneurs and business owners (Volume 4: Pre-IPO planning) and (Volume 5: Pre-Sale planning).

5

Step 1Select a business succession advisory team


In order to effectively balance the financial, business, tax and familial demands of transitioning a business, the owner should seek to benefit from the expertise, guidance and objectivity offered by a team of professionals who are well-versed in the challenges associated with familial succession.

Intergenerational succession can be one of the greatest hurdles that a family business will

encounter during its life cycle. An entrepreneur contemplating such an undertaking will

have to endure the potentially “charged” emotional responses that the transition may elicit

from individual family members, in addition to a broad array of strategic, legal, tax and

financial challenges.

7

The Certified Public Accountant (“CPA”)

The services of a CPA will be required in order to ensure

compliance, cohesion and continuity within the affairs

of a business and its owners – especially in light of a

familial succession.

Consultants

Within the realm of business succession, family members

may wish to employ the services of Consultants who

specialize in minimizing the emotional tension that can

arise in such instances. These experts are also generally

capable of providing assistance in developing and deploying

mechanisms that can provide added coherence to the

contemplated business transition (e.g., the drafting of a

“family business mission statement”).5

The Corporate Attorney

A Corporate Attorney may be necessary in instances

where the transfer of the family business necessitates a

restructuring of business holdings.

The Corporate Trust Company

Corporate Trustees (as an alternative to an individual

trustee) can provide much needed professionalism and

objectivity for any fiduciary structure that is established

within the context of multigenerational planning. This can

be especially beneficial for closely held family businesses

where conflict and discord are key planning risks.

External Stakeholders

Although External Stakeholders (e.g., vendors, creditors,

suppliers, etc.) may not directly engage in the business

succession plan, their input can often provide valuable

insight regarding how best to address many of the

broader commercial repercussions of the handover.

The Insurance Agents

The transition of a business from one leader to another

will normally require a reevaluation and recalibration of

several key insurance areas for both the company itself

(e.g., key man insurance) as well as stakeholders (e.g., life

insurance). The Insurance Agent can provide invaluable

assistance in this regard.

The Investment Representative (“IR”)

The role of the Investment Representative is to provide

professional investment advice to family members and

to tailor it to take into account the risks and benefits

associated with the family enterprise.

The Trust & Estate Attorney (“T&E Attorney”)

The level of complexity associated with trust and estate

planning for family business succession requires that a

seasoned Trust & Estate Attorney be employed in order to

ensure the development and execution of an effective plan.

The Valuation Consultant

Valuation experts are key participants in the business

succession process and can provide objective metrics

in an effort to withstand the scrutiny of potential IRS

audits and regulatory review.

The Wealth Advisor

A Wealth Advisor is normally a trained tax or trust

and estate attorney who works with an Investment

Representative to assist in aligning the personal wealth

planning needs of familial stakeholders with their

commercial interests in the family business.

Although the specific configuration of the team will vary depending upon the circumstances, the advisory team of a business owner who is preparing to transition his or her company to family members will normally consist of some (or all) of the following advisors:

5. See infra, Step 2 for additional information regarding “family business mission statements.”


Figure 2: Business owners should leverage a core advisory team to resolve key business issues

Develop a business

succession plan

Overcomebarriers tosuccession

Realign investment

portfolios

Optimizeinsurancecoverage

Transition phasebusiness owner

CorporateAttorney

ValuationConsultant

InsuranceAgent

WealthAdvisor

Consultants

Accountant

InvestmentRepresentative

Trust & EstateAttorney

ExternalStakeholders

CorporateTrustee

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy insurance or the securities or other instruments mentioned herein.

Neither Barclays nor its affiliated companies sell or solicit insurance. You should consult with your licensed insurance agent for further information on insurance products or services.

Neither Barclays in the US nor its Wealth and Investment Management employees in the US render tax or legal advice. Please consult with your accountant, tax advisor, and/or attorney for advice concerning your particular circumstances.

9

Step 2Analyze the potential barriers to succession planning


The challenges associated with any commercial venture tend to be magnified when undertaken against the backdrop of business succession. This is due to the confluence of stakeholder interests and perspectives.

In assessing the viability of a business succession plan, an entrepreneur is well-advised

to carefully examine and account for the various obstacles that may undermine such an

undertaking. Normally, these barriers can be divided into four distinct categories (or some

combination thereof):

> Ownership barriers

> Family barriers

> Economic barriers

> Management barriers

Each of these issues will be addressed in turn.

Figure 3: Potential barriers to business succession planning

Ownership barriers Family barriers

Management barriers Economic barriers

Proposed succession plan

11

Q: What are some of the typical ownership barriers to business succession planning?

Ownership barriers to business succession planning can be among the most difficult to surmount –

if only because the business owner retains ultimate decision-making authority regarding the

adoption of any plan to transfer the company to heirs and other family members. Furthermore,

many entrepreneurs tend to be successful by virtue of their intense drive, tenacity and intractability.

These, in turn, can ultimately become the very personality characteristics that impede their ability to

relinquish control over their businesses.

In the event that the owner is the primary barrier to the transfer of the business, it can often be helpful

to seek the assistance of the external advisory team. In some instances, their objective input can provide

valuable insight regarding how best to address the specific hurdles that are of particular concern to the

business owner.

Consult with your Trust & Estate Attorney: In the event that retaining an element of control

over the business enterprise beyond the date of retirement is an issue for the entrepreneur, a

Trust & Estate Attorney can provide assistance in crafting a business and estate plan that

balances the business owner’s need to retain a degree of commercial oversight with the

company’s need to successfully transition control to a successor.

Consult with your Investment Representative: Occasionally, a business owner will feel

unable to step down due to the perception that he or she does not possess the financial

resources necessary to fund a comfortable retirement lifestyle. In many instances, an

Investment Representative can propose an investment portfolio to help generate the income

necessary to live comfortably while also addressing other investor concerns (e.g., risk profile,

diversification, etc).

Figure 4: Potential ownership barriers



Considerations:Is the founder emotionally prepared to step down?

Is the founder financially prepared to step down?

Does the founder feel ambivalent about transferring the business?

Does the founder refuse to accept his/her own mortality?

Is the founder having difficulty separating his/her personal identity from that of the business?

Does the presence of more than one founder complicate matters?

What are the potential ownership barriers to succession?


Q: What is an example of a common ownership barrier? What techniques or methodologies can be used to overcome it?

A common hurdle that arises within the context of “ownership barriers” is when entrepreneurs are

unable to decide which methodology to employ when transitioning leadership of the business to

their children. Often, this resistance can arise from an adamant unwillingness to retire, from concerns

regarding the skills or experience of potential successors, or as a result of broader conflict within the family

unit regarding who should be given the opportunity to run the company going forward.

There are essentially three leadership transition strategies that can be pursued, each with its own

opportunities and challenges:

> Phased transition of power to a single family member

> Phased transition of power to multiple family members

> Utilization of an interim (external) leader

Overcoming ownership resistance to a succession planning exercise (in particular, choosing a proper

successor) typically entails clearly articulating the range of strategic options available as well as each

option’s respective pros and cons. In the event that the business owner is still unwilling or unable to

adopt a course of action following that analysis, it may be helpful to ask an objective advisor to clearly

outline the impact of continuing along the course of the current, default path (often referred to as the

“do nothing” approach).

In the case of leadership succession, for example, an Investment Representative may call upon a

Wealth Advisor to discuss what the repercussions for the business would be if the owner failed to

implement an orderly succession plan prior to his or her departure (or passing).

Figure 5: Key considerations when transitioning leadership to the next generation

Phased transition of power to a single family member(e.g., owner slowly mentors son or daughter to operate

the business)

Provides an opportunity for the future leader to develop required

skill sets prior to adopting a leadership role

Can be undermined by sibling jealousy, a clash of

styles, or a generational “gulf” in mindsets

Potential opportunities Strategies

VS.

Challenges

Phased transition of power to multiple family members

(e.g., owner mentors various candidates to assess who may

be the best fit)

A thorough assessment can be undertaken by the owner to determine who is best suited

to operate the business

There is a high possibility of family conflict due to the

competitive environment this approach may foster

VS.

Utilization of an interim (external) leader

(e.g., owner appoints an external leader to groom family

member(s) for leadership role over time)

May minimize intrafamilial conflict

The owner may lose direct oversight over the selection of

a future leader

13

In many instances, being confronted with the various consequences of a failure to act can be

sufficiently sobering to induce an entrepreneur to adopt a solution – any solution – despite its

inherent shortcomings.

Consult with your Accountant and your Trust & Estate Attorney: Your Accountant and

your Trust & Estate Attorney can help you develop a detailed “cost benefit” outline of the

various approaches to selecting a suitable successor for the family business.

Q: What are some of the typical family barriers to business succession planning?

The barriers to business succession planning that originate with family members are often the

most difficult to address as these issues are generally the least likely to be openly, objectively and

rationally debated. Indeed, intrafamilial communication is a challenging undertaking for many

individuals under even the most ideal circumstances. However, in instances where the complexities

of a closely held business enterprise are superimposed upon an existing family dynamic, they can

often serve to heighten tensions in unpredictable and potentially destructive ways.

Fortunately, when family dynamics or concerns are pivotal obstacles to effective succession

planning, experienced estate and corporate attorneys can often develop creative solutions to help

minimize intrafamilial conflict.

Consult with your Wealth Advisor, your Corporate Attorney, and your Trust & Estate Attorney: There are a range of control strategies (e.g., voting and non-voting shares, limited

partnerships, trust structures, etc.) that can be used to balance the needs and desires of

family members and owners. Once key issues have been identified, your advisors can provide

guidance with regard to effective strategies and techniques.

Figure 6: Potential family barriers



Considerations:Are there concerns that family members will not be treated fairly and equitably following the transition?

Are family members reluctant to enter into the family business?

Do family members and the founder possess a compatible vision for the future of the business?

Do step-siblings and/or multiple marriages complicate the question of succession?

What are the potential family barriers to succession?


Figure 7: Craft a family business mission statement

A checklist of topics to consider when developing a family business mission statement

What are the short-term, mid-term, and long-term strategic plans for the business?Assume that the family concludes that it wishes to expand the business in the near term.

Pertinent additional questions could include:

• Which lines of business will be impacted (e.g., existing vs. new business lines)?

• Into which markets will expansion take place (e.g., which cities, states, countries)?

• In what manner will the expansion occur (e.g., through acquisition)?

• Over what period of time will the expansion occur (e.g., six months, one year, five years)?

• How will the expansion be funded (e.g., internal cash flow, borrowing, etc.)?

How will family members and employees be involved in the future plans for the business?• What will the ownership structure look like?

• Who will be permitted to own an interest in the business (e.g., family members or key employees)?

• Can these ownership interests be freely sold or gifted?

• What restrictions (if any) will be imposed upon ownership interests in the event of the divorce,

death, departure or disability of an owner?

• Will there be various classes of ownership (e.g., multiple classes of stock)?

What is the family’s broader “vision” for the future of the organization?• What role should the business play in the legacy of the family?

• What role should the business play in the community?

• What philanthropic goals should be considered within the context of the business enterprise?

Have mechanisms been put in place to facilitate ongoing governance of the business?• Is there a “Code of Conduct” for family members?

• What is the process for resolving disputes within the family business?

• Will family members be provided with leadership training?

• Will family members participate in ongoing business education?

Has an exit strategy been contemplated or discussed?

For example, assume that the family concludes that they would like to ultimately participate in an

Initial Public Offering (“IPO”). Pertinent additional questions would include:

• Is the current entity structure suitable for an IPO?

• Have investment bankers been recruited to provide suitable IPO guidance?

• Have audited financial statements been prepared?

• Has an estimated IPO timeline been developed?

Q: What is an example of a common family barrier? What techniques or methodologies can be used to overcome it?

A common family barrier that entrepreneurs may encounter during succession planning stems

from the inability of a business strategy to effectively address (and balance) the concerns of family

members and business stakeholders.

One possible solution is to craft a family business mission statement. Key questions often addressed

within such a document are outlined below.

15

Essentially, a family business mission statement is a coordinated strategic undertaking that seeks

to define and align the commercial and familial elements of the company. Indeed, due to its inherent

flexibility, the document can be structured to address not only the succession concerns of various

company stakeholders, but also considerations as diverse as:

> Contemplated business expansion

> Ownership structuring

> Philanthropic undertakings

> Behavioral governance

> Long-term strategic positioning

> Compensation mechanisms

> Capitalization and funding options

> Family employment guidelines

Discuss with your Consultant: Consultants who specialize in family succession governance

will often be able to provide business owners with a template that will allow them to craft a

tailored family business mission statement.

Q: What are some of the typical economic barriers to business succession planning?

Economic barriers tend to be driven by both external and (primarily) non-emotional factors, making

them the easiest ones to discuss openly among stakeholders. For this reason, these challenges can

often be identified and analyzed by business owners and a few select advisors with relative ease.

Figure 8: Potential economic barriers



Considerations:Do economic conditions make it difficult to transfer the business?

Are there tax, regulatory or legislative forces that will impact succession?

How will clients react to the succession?

How will competitors react to the succession?

How will suppliers react to the succession?

What are the potential economicbarriers to succession?


However, this is not to imply that these issues can always be easily addressed and dispensed with.

Certain variables (e.g., difficult economic conditions or daunting regulatory hurdles) can prove to

be formidable obstacles to smooth and efficient succession planning. Despite this, assuming that

owners, family members and employees can agree upon a common path forward, there are likely

to be professional advisors who will be willing and able to craft creative solutions to help advance

stakeholders along that path and toward a positive resolution of any such hurdles.

Q: What is an example of a common economic barrier? What techniques or methodologies can be used to overcome it?

In some instances, difficult economic conditions can convince owners that it is an inopportune time

to proceed with succession planning. Often, this reluctance will find voice in statements such as:

> “This is a challenging period for the business. I can’t step away at this time.”

> “Profits are down and the company is underperforming. I need to remain here in order to turn things around.”

> “As soon as the business gets back on its feet, I’ll be in a position to hand over the reins to my successor.”

Rather than focus purely upon the negative consequences of a challenging economic environment,

entrepreneurs should consider working with their advisors to take advantage of the resultant – and hopefully

temporary – downturn in the company’s valuation. This can be done by utilizing sophisticated planning

techniques to opportunistically transfer wealth to family members in a timely and tax-efficient manner.

An example of such a technique, using a Family Limited Partnership (“FLP”), is illustrated below:

Figure 9: An opportunistic business succession plan

LP Interest

LP Interest

Value ofbusiness

Business valuationdecrease

Transfer into FLPValue growth within FLP

Value ofbusiness

Decrease in valuation

FLP

Value ofbusiness

GP Interest

GP Interest

GP Interest

GP Interest

LP Interest

LP Interest

LP Interest

LP Interest FLP

Value ofbusiness

Opportunisticbusiness transfer

Growth in valuation passes to beneficiaries

Step 1 Step 2 Step 3

This is for illustrative purposes only and does not represent the return of any investments. Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses.

17

A decrease in the value of a business can serve as the foundation for a strategic redistribution of

wealth to junior family members using a vehicle (e.g., an FLP) that allows recipients to participate in

the subsequent recovery of firm “value” while also ensuring that current owners retain oversight and

control over the company.

Consult with your Investment Representative: Although FLPs can be used to minimize the

impact of gift and estate taxes and affect viable business succession planning, they may not be

suitable for all business owners. You can work with your Investment Representative to get a full

understanding of the limitations, considerations and inherent risks associated with FLPs.

Consult with your Valuation Consultant and your Trust & Estate Attorney: By working in

tandem with one another, your Valuation Consultant and your Trust & Estate Attorney will

normally be able to craft a succession plan that seeks to capitalize on suboptimal company

valuations while also ensuring that control and oversight of the business is not surrendered

during (or following) a handover period.

Q: What are some of the typical management barriers to business succession planning?

The impact of potential management barriers upon a business succession plan will normally

be dependent upon such factors as:

> The structure of the business entity

> The size of the organization

> The roles that employees play within the firm’s strategic hierarchy

Figure 10: Potential management barriers



Considerations:Do employees have concerns about the transition plan?

Will employees find it difficult to work with anyone but the founder?

Will a transition in control necessitate a redistribution of roles and responsibilities within management?

Are there minority owners whose opinions may influence the succession plan?

What are the potential management barriers to succession?


In some instances, the input and opinion of select management stakeholders will be a key

determinant of the potential success or failure of the proposed succession plan. In other cases,

such individuals will not be predisposed (or empowered) to have any impact upon the direction

and pace of organizational change.

Q: What is an example of a common management barrier? What techniques or methodologies can be used to

overcome it?

Management barriers to business succession are most likely to arise when employees and/or

key management personnel feel that their interests diverge from changes or recommendations

articulated within a proposed business succession plan. In response to this concern, a constructive

approach is often to implement a strategy that realigns the interests of management personnel and

employees, while also serving as a vehicle to advance the business succession needs of owners.

An example of such an approach is an Employee Stock Ownership Plan (“ESOP”).6 At the most

basic level, an ESOP is a qualified retirement vehicle that is permitted to purchase the stock of

a business owner’s enterprise (note: an ESOP can borrow money and use the loan proceeds

to purchase stock).

The figure below outlines the planning steps associated with a sample ESOP transaction.

Figure 11: An example of an ESOP transaction

Corporation

B

D F

A

A

B

C

D

E

C

Bank

ESOP Shareholder

QualifiedReplacement

Property (“QRP”)

In order to fund a purchase of the shareholder’s stock, the ESOP obtains a loan from a bank. In return, the bank receives a note from the ESOP. Alternatively, the Company borrows money from a bank and loans the proceeds to the ESOP.

The note is guaranteed by the corporation.

The ESOP (using the loan proceeds) purchases stock from the shareholder. This stock serves as collateral for the loan.

On an annual basis, the corporation contributes a combination of principal and interest, and pays dividends to the ESOP. The contributions and dividends are deductible.

E

F

The principal, interest and dividend contributions to the ESOP are used to pay back the loan to the bank (used to fund the stock purchase). The stock held as collateral is released as the note is paid off.

Within 12 months of the stock sale, and if the corporation is a C-Corporation, the shareholder can take the proceeds from the sale and can invest (tax deferred) in securities of certain domestic operating companies (“QRP”). [Note: Taking loans against these assets is also a possibility.]

This is for illustrative purposes only. Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses.

6. See, generally, Internal Revenue Code, Section 1042 et al.

19

ESOPs can serve as a means to reinforce the desired synergies between managers, business owners

and other key stakeholders by potentially providing substantial benefits to these parties, including:

> Improving management and employee performance by instilling a culture of “ownership” within the company

> Enabling entrepreneurs to sell a minority interest in their closely held stock (e.g., 35%) while retaining a controlling interest that can be subsequently passed on to heirs and descendants (or sold to key executives)

> Creating a controlled (and tax-advantaged) market for the purchase of the entrepreneur’s business equity

> Enabling the company to deduct principal payments on ESOP debt

> Helping entrepreneurs diversify away from their concentrated company stock in a tax-efficient manner and reinvest the proceeds in a diversified portfolio of investments

> Providing a vehicle for “cashing out” minority shareholders (if desired)

Consult with your Accountant, your Trust & Estate Attorney or ESOP Attorney: ESOPs,

while powerful planning tools, are subject to a variety of complex rules and restrictions

that should only be addressed under the supervision of an ESOP expert. Due to limitations,

considerations and inherent risks associated with ESOPs, they may not be suitable for

all investors.

Consult with your Accountant: As a planning option, ESOPs are available for both C-Corps

and S-Corps.7 However, business owners whose companies are structured as S-Corps should

work with their accountants to navigate the unique regulations that apply in this context

(as they vary from those that apply to C-Corps).

7. By contrast, sole proprietorships, partnerships and LLCs are unable to establish ESOPs.

Diversification does not guarantee a profit or protect against a loss.


Step 3Review your trust and estate planning needs

21

For many entrepreneurs, their business is the largest asset they own as well as the cornerstone of any contemplated business succession plan. A failure to coordinate the two undertakings could lead to a staggering loss of personal wealth as well as a disruption to the growth trajectory of the family business.

The effective coordination of a business owner’s estate and business succession plans can help

provide numerous benefits to entrepreneurs, their businesses, and their families, including:

Q: How conducive is the current tax landscape toward business succession planning?

Fortunately for business owners, the current estate and gift tax legislation offers entrepreneurs an

extremely favorable environment within which to undertake business succession planning. By virtue

of legislation finalized in 2013 (the “Act”), the current estate planning environment is characterized by:

> High estate, GST, and gift tax exemption amounts (in excess of $5 million per person)

> Relatively modest estate, GST, and gift tax rates of 40%

Figure 12: Building a comprehensive plan adds value at all stages of the development of a business

Time

Val

ue o

f bus

ines

s

What planning techniques should I consider as I form

my business?

What planning techniques should I

consider as I grow my business?

What planning techniques should I

consider as I transfer or exit my business?

What planning techniques should I consider after I exit

my business?

> An increased likelihood of achieving financial, familial and personal goals

> Lower estate tax burdens

> Lower gift tax burdens

> Greater wealth planning flexibility during the lifetime of the business

> Fewer barriers during the “exit” phase of the business

> Greater intrafamilial harmony


Calendar year

Estate tax exemption

GST tax exemption

Gift tax exemption

Top estate, GST and gift tax rates

2003 $1 million $1.12 million $1 million 49%

2004 $1.5 million $1.5 million $1 million 48%


2006 $2 million $2 million $1 million 46%

2007 and 2008 $2 million $2 million $1 million 45%


2010 (taxes repealed) (taxes repealed) $1 million 35% (gift tax)

2011 $5 million $5 million $5 million 35%

2012 $5.12 million $5.12 million $5.12 million 35%

2013 $5.25 million $5.25 million $5.25 million 40%

2014* $5.34 million $5.34 million $5.34 million 40%

Figure 13: Historical estate, GST, and gift exemption values and rates

As a result, business owners who undertake thoughtful, timely and coordinated business and

familial succession planning will normally be able to pass significant amounts of wealth to desired

beneficiaries in a tax-efficient manner.

The chart below summarizes the historical federal estate, GST, and gift tax exemptions.

Q: Are there any state tax considerations that business owners should be cognizant of as they embark upon estate planning and business succession?

Although business owners will benefit from the current estate and gift tax provisions of the Act, it

is important to remember that federal taxation is only one of the considerations a taxpayer needs

to account for in this context. Many states impose their own estate taxes (at rates up to 16%) while

Connecticut also imposes a state-level gift tax. Further, many of these states have much lower

exemption or threshold amounts.8 For these reasons, many business owners – even those with

relatively modest estates – remain at risk for exposure to some form of estate or gift taxation.

Consult with your Wealth Advisor and your Investment Representative: All business

owners should work with their advisors and remain vigilant with regard to potential upcoming

estate and gift tax changes. It is normally worthwhile to request a periodic review of one’s

estate plan to ensure that it is up to date.

8. Such exemption or threshold amounts are usually between $675,000 and $2,000,000 per spouse.

Neither Barclays in the US nor its Wealth and Investment Management employees in the US render tax or legal advice. You should consult with your accountant, tax advisor, and/or attorney for advice concerning your particular circumstances.

*Exemption figures will be inflation-adjusted in subsequent years. Source Data: Internal Revenue Service (IRS) as of April 2014.

23

Q: How might trusts be used to assist a business owner with estate and succession planning?

Trusts permit business owners seeking to engage in strategic estate and succession planning with

a means to pass wealth (or business interests) to subsequent generations in a manner that provides

additional protection for beneficiaries against a range of risks that include:

> Lawsuits

> Divorce

> Family discord

> Future changes to the estate and gift tax

> Beneficiaries who may be unprepared to inherit and manage a business (or vast amounts of wealth)

There are a broad array of planning methodologies that business owners can select from in order

to efficiently and effectively move wealth to subsequent generations. The most common solution

involves having a business owner establish trusts for the benefit of family members and working with

advisors to ensure that the terms of the trusts reflect the grantor’s wishes. If properly structured,

the resultant trust vehicle can be tailored to reinforce the entrepreneur’s holistic wealth plan and can

prove to be an extremely effective means of accomplishing a family’s goals.9

The figure below highlights the basic workings and potential benefits of a trust.

Consult with your Wealth Advisor and your Trust & Estate Attorney: Your Wealth Advisor

and your Trust & Estate Attorney can provide guidance on appropriate trust structuring

alternatives and can facilitate the structure’s incorporation into your broader wealth and

business succession plans.

Visuals on this page are for illustrative purposes only.

9. The results of an individual’s Financial Personality Assessment (“FPA”) can be extremely helpful in guiding him or her toward setting up the correct trust vehicle, as well as making the best choice for trustee(s).

Figure 14: Potential benefits of a trust structure

Benefits of a trust include:Estate tax minimization; Flexibility

to benefit multiple generations and/or charities; Creditor protection;

Probate avoidance.

Grantor Trust Beneficiary

The individual who sets up the trust structure and contributes

assets to the trust.

The recipient (or recipients) of the trust assets.


Q: How might corporate trustees be integrated into a planning structure that involves a family business?

When establishing a trust for the benefit of family members and loved ones, the question of who

should act as trustee merits particular attention. Although individuals often appoint a family member

or friend to act as a trustee, such people often lack the expertise required to understand and

undertake their fiduciary duties. Further, in instances where an individual acting as a trustee is also a

stakeholder in a family business or enterprise, the potential conflict resulting from their dual roles can

undermine their effectiveness in either capacity.

For these and other reasons, an increasingly popular alternative involves the appointment of a

corporate fiduciary to act as sole or co-trustee.

The figure below outlines some of the additional benefits of a corporate trustee.

Consult with your Trust & Estate Attorney and your Corporate Trustee: Your Trust & Estate

Attorney and your Corporate Trustee can tailor a corporate trust solution that could benefit you

and your family in an effective and tax-efficient manner while also protecting the legacy of your

business interests.

Figure 15: Additional benefits of a corporate trustee

Benefits of a corporate trustee include:

Professional administration; Enhanced creditor protection; Multigenerational oversight;

High level of investment expertise.

Grantor Trust(With a corporate trustee) Beneficiary

The individual who sets up the trust structure and contributes

assets to the trust.

The recipient (or recipients) of the trust assets.

25

Figure 16: Utilize an Intentionally Defective Grantor Trust (“IDGT”)

The Grantor gifts/sells assets to a trust in anticipation of appreciation.

This transfer may be subject to gift tax.

The Grantor pays all income tax associated with the trust assets.

The repayment by the trust to the grantor occurs via a

promissory note.

Distributions from the IDGT will pass to the beneficiaries

gift-tax free.

The wider the spread between the interest rate and the rate of

investment growth, the greater the value ultimately transferred

to beneficiaries.

GrantorTrust

(IDGT) Beneficiary

Q: How can trusts be used to benefit from the (anticipated) appreciation in a company’s value over time?

Over the course of a company’s strategic life cycle, the value of a successful business will normally

appreciate. Although the benefits associated with this enhancement of value are self evident, the

challenges associated with effectively redistributing the ensuing wealth can limit the efficiency of

subsequent business succession plans.

One potential solution to this problem involves establishing vehicles that permit the longer-term

increase in company value to accrue to beneficiaries while simultaneously minimizing the impact of

estate and gift taxes. An example of such a vehicle is the Intentionally Defective Grantor Trust (“IDGT”).

The figure below highlights some of the specific characteristics associated with IDGTs.

Consult with your Investment Representative: Although an IDGT seeks to minimize gift

tax consequences, it may not be a suitable structure for all investors, depending on the

nature of the investable assets and whether or not they appreciate in value. IDGTs carry

limitations and inherent risks. You should consult with your Investment Representative

for more complete information.

Consult with your Wealth Advisor and your Trust & Estate Attorney: Your Wealth Advisor

and your Trust & Estate Attorney can provide insight into how an IDGT might best be

coordinated with your broader business succession and estate plans.


Step 4Consider “next steps”

27

Figure 17: Post-transition phase wealth planning

What is the next step in the strategic life cycle of business ownership?

What do I need to consider as I form

my business?

VOLUME 1

Formation phase

What do I need to consider as I grow

my business?

VOLUME 2

Growth phase

What do I need to consider after exiting

my business?

VOLUME 6

Post-Exitconsiderations

What do I need to consider as I transition my business?

VOLUME 3

Transitioning to family members

or

VOLUME 4

Pre-IPO planningor

VOLUME 5

Pre-Sale planning

Q: What are the key “next steps” that an entrepreneur should consider at this juncture?

Having successfully transitioned his or her business to family members, the entrepreneur can then

shift the focus away from entrepreneurial pursuits and toward those considerations that take on

additional prominence following a retirement from the family business.


For many entrepreneurs, the transition of a business to family members is a uniquely challenging

experience – one that is characterized by the need to:

> Assemble a business succession advisory team

> Analyze the potential barriers to succession planning

> Review applicable trust and estate planning strategies

At Barclays, our tailored wealth management approach allows business owners to align this period

in the strategic life cycle of their businesses with their corresponding wealth management plans.

This is achieved by instructing post-exit entrepreneurs on how to:

> Understand their wealth

> Organize their wealth

> Understand their risk tolerance

> Understand their financial personality

> Invest their wealth

These topics are addressed in the final volume of this series – Strategic wealth management for

entrepreneurs and business owners (Volume 6: Post-Exit considerations).

By contrast, those family members who have assumed control of the family business must continue

to focus on the management of the companies now under their purview, while also analyzing how

best to position the companies for an eventual:

> Transfer to their own children

> Initial public offering (“IPO”)

> Sale to a third party

In this regard, the need for thoughtful and integrated wealth planning is a constant and consistent

theme for each generation associated with a family business.

Consult with your Investment Representative: For an introduction into the planning

considerations discussed above, ask your Investment Representative(s) for copies of the

Barclays publications entitled:

> Strategic wealth management for entrepreneurs and business owners (Volume 4: Pre-IPO planning)

> Strategic wealth management for entrepreneurs and business owners (Volume 5: Pre-Sale planning)

29

“ Life is really simple, but we insist on making it complicated.”

Confucius


Conclusion

An elegant paradoxConfucius was noted to have observed that, “Life is really simple, but we insist on making

it complicated.”

Indeed, if the wish to benefit one’s family serves as one of life’s simple and universal truths, it is

an undeniable reality that few things can prove to be more complicated and potentially vexing

than the union of one’s family and one’s business.

For the owners of many closely held businesses, forging an enduring peace between these two –

often competing – interests can prove to be a task so overwhelming and daunting that it may never

be undertaken at all. On those occasions, the most poignant irony stems from the fact that the very

family members who stand to gain the most from an effective wealth management strategy can

ultimately become the very causes of its undoing.

Working togetherHere at Barclays, we understand that business succession planning requires both the deft

application of technical skill as well as a delicate balancing of complex emotional considerations.

In light of this, we strive to provide business owners and their families with the insight, information,

and guidance required to forge a robust entrepreneurial and familial legacy.

We appreciate how hard entrepreneurs must work in order to create a successful business.

To that end, we seek to work with you in order to ensure that what you have created will

not only endure, but flourish.

We look forward to assisting you in securing your legacy.

This page has been intentionally left blank.

Important DisclosuresDiversification does not guarantee a profit or protect against a loss.

Investing in securities involves a certain amount of risk. You are urged to review all prospectuses and other offering information prior to investing. Past performance is not a guarantee of future performance.

This material is provided by Barclays for information purposes only, and does not constitute tax advice.

Neither Barclays in the US nor its Wealth and Investment Management employees in the US render tax or legal advice. Please consult with your accountant, tax advisor, and/or attorney for advice concerning your particular circumstances.

Not all products described in these materials are offered by Barclays and not all products are suitable for all clients.

Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses.

“Barclays” refers to any company in the Barclays PLC group of companies.

Barclays offers wealth management products and services to its clients through Barclays Bank PLC (“BBPLC”) and functions in the United States through Barclays Capital Inc. (“BCI”), an affiliate of BBPLC. BCI is a registered broker dealer and investment adviser, regulated by the U.S. Securities and Exchange Commission, with offices at 745 Seventh Avenue, New York, New York 10019. Member FINRA and SIPC.

The wealth management products offered by Barclays in the United States clear through, and where applicable, assets are custodied by, Pershing LLC, a subsidiary of the Bank of New York Mellon Corporation. Pershing LLC is a member of FINRA, NYSE and SIPC.

Barclays Bank PLC is registered in England and authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered No. 1026167. Registered Office: 1 Churchill Place, London E14 5HP.

©Copyright 2015 Barclays.

CSNY489394 v23 | July 2015

Retirement Account General DisclosureThis report is intended to provide only investment education and information and is not intended to constitute “investment advice” or an investment recommendation within the meaning of the Employee Retirement Income Security Act of 1974 (“ERISA”) or Section 4975 of the Internal Revenue Code of 1986 (the “Code”). Any investment products or managers specified in this report are for illustrative purposes only and other products or managers may be available or appropriate to fulfill the particular asset class. You are solely responsible for evaluating and acting upon the education and information contained in this report, and you will not rely on this report, the information contained herein, or Barclays as a primary basis for your investment decisions. Moreover; any discussion, analyses, or information furnished by Barclays regarding its advisory services, including sample asset allocations or discussions of potential investment options or alternatives, should not be considered investment advice or part of any advisory service offered by Barclays. Such discussion, analyses and information is provided for educational purposes only and for the purpose of allowing you to understand and evaluate Barclays’ various advisory services and available investment alternatives. Accordingly, you acknowledge and agree that: (i) any and all discussions, analyses, and information furnished by Barclays in connection with your retention of Barclays or investment in an investment alternative was not intended to and shall not serve as a primary basis for your decision with respect to any investment determination; (ii) Barclays is not providing investment advice or otherwise acting as a fiduciary under the Investment Advisers Act of 1940, ERISA, or Section 4975 of the Code in connection with such discussions, analyses, or information; and (iii) any and all asset allocation and investment option decisions, both initial and ongoing, are made independently by you and without reliance upon any advice or recommendations of Barclays.

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Strategic wealth management for entrepreneurs and business ... · ... 25 Step 4: Consider “next ... into the wealth management implications of starting a business venture, ... wealth