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Estate Planning Strategies

Because values and security prices have dropped to all time lows combined with record low interest rates means it’s a good time to lock in the value of your estate for estate tax purposes. It could preserve future cash flow by reducing inheritance taxes on the transfer of estate assets to your beneficiaries.There are a number of strategies you can use to take advantage of depressed market values to remove future appreciation on assets in your taxable estate and pass that appreciation to beneficiaries with no gift tax. One of the best tools to accomplish this is utilization of Grantor Retained Annuity Trusts (GRAT). This strategy is accomplished by the donor placing property that is likely to appreciate over its current value into a trust combined with the grantor’s right to receive a fixed annuity with remaining trust assets passing to the grantor’s children or other beneficiaries. This can be an outright transfer or includable into a continuing trust.

The neat component of this strategy is that the grantor’s retained annuity is designed so that its present value determined by IRS rules is equal to the current value of the contributed assets. The effect of this action is that the present value of the remainder gift to beneficiaries is zero ($0).

The IRS assumes that assets contributed to a GRAT will appreciate at a fixed interest rate which is called the “7520 rate.” For GRATS funded in January 2009 the 7520 rate will be 2.4%. Accordingly, to the extent that appreciation of GRAT asset exceeds 2.4%, it will pass to the remainder beneficiaries with no transfer tax consequences. Therefore, the GRAT program effectively freezes the value of assets for estate tax purposes at current low prices and values.

There could be some drawbacks in that some portion of the annuity payments will have to be made in kind, thus requiring revaluation of the trust assets on an annual basis. Another drawback is that this strategy isn’t well suited for passing wealth to grandchildren and other more remote descendents.

There are other strategies we can utilize which will be discussed in future blog posts. The GRAT strategy is a no lose situation. All you need if for one GRAT trust to work and you’re ahead because if other GRAT trusts don’t work you still haven’t lost anything.

We’ll share other estate and gifting strategies in subsequent blog posts.

Recession Survival

How you do survive the worst economic downturn since the great depression? This is a big question. Many people never experienced the depression or even the big recession of 1981 and 1982. I was a controller of a large corporation back in 81-82. This got me thinking about how could I provide guidance to those who haven’t experienced such turbulence.

Based on my experiences I created a toolkit to package all the tips and techniques of how to get through the tough times. One of the key elements of the survival toolkit is developing a plan and a budget for recession survival. The toolkit contains a cash flow and budgeting template. The process of developing a plan should include an assessment of whether the business needs a tune up, a turnaround, or is in a state of crisis. When you can’t cover payroll, you’re in a crisis. This is why cash is king. If you don’t have adequate liquidity or access to cash, the chances for survival get pretty slim.

During a recession it is time to get aggressive with your sales and marketing. It isn’t always just pricing. Make sure you reach as many potential customers as possible. It’s a numbers game, and having more leads in the pipeline is crucial. Understanding your profit margins is another essential step so you can make price adjustments and at the right level to secure a greater share of the market.

The Recession Survival Toolkit  outlines tips and techniques for reducing costs on every facet of the business. Just reviewing all of the potential opportunities to reduce costs is a healthy process. Usually the first step in cutting back is reduction of headcount. There are numerous ways to control payroll costs without reducing headcount. Consider adjusting hours worked or vacations with out pay as a way of keeping your valuable employees.

Another opportunity is to use lean workflow techniques and paperless systems to streamline the office and accounting functions. Not only is it cheaper, but it speeds up data retrieval, improves accuracy and saves time. It also minimizes the cost of paper and storage space.

Getting financing and having a relationship with your banker is a key element of making it through tough times. When your bank is your partner, your survival chances get a lot better. The toolkit reveals the techniques used by banks to make loan decisions. When you understand what the bank wants, you are in a better position to get the necessary financing.

Having developed a recession survival toolkit for businesses, I am now motivated to provide more guidance for individuals and retirees. I think CPAs have a responsibility to help citizens achieve a higher level of financial fitness. The AICPA and the Virginia Society of CPAs have launched a website that offers a great deal of information and advice on financial management.

Remember, it took a while for us to get in this mess, and it is going to take focus, patience, and discipline for us to get healthy again.

The Reality of IFRS

I am sure many CPAs have seen IFRS and heard there was going to be a convergence from Generally Accepted Accounting Principles (GAAP) to international accounting standards. But how many of them realize the magnitude of what lies ahead? I was involved in teaching SOX and internal control standards under Section 404. This gives me a pretty good idea of the effort required to make the shift. Since this web site and blog is geared to providing current and cutting edge information for businesses and CPAs it made sense to get on the IFRS band wagon sooner rather than later.Why all the fuss? Well IFRS accounting standards have been adopted by 113 countries and by 2011 it will be the standard used by 150 countries. The United States is immersed in global business and investors need to have the ability to evaluate investments around the globe. This makes a pretty good cased for a single set of globally accepted accounting standards. As was the case with SOX, CPAs are not yet prepared to shift to IFRS. Because of the global implications, CPAs in the United States will need to be capable of preparing and interpreting financial statements using IFRS.

The education process will be massive. It will impact investors, CPAs, and other specialists such as actuaries, and professional associations. Comprehensive education programs will be needed across the board. The AICPA has launched an initiative to help educate and pave the way for 2010 when conversion will likely be a reality.

In drafting this post the potential impact of the transition became starkly real. Colleges and universities will need to revise their curricula to accommodate the new standards. The CPA exam will need to be revised. Many CPAs could find themselves in situations where clients will demand adoption of IFRS. Those CPAs who make the effort to educate themselves will be on the winning end of the conversion game. My prediction is there will be more unprepared accountants versus those who make the leap.

This post is just the beginning and a way of sounding the alarm. I will be busy in the months ahead developing training material. Plus, we will be offering regular and current information on this site to help with the education process.  I’m looking forward to the journey, so sign up for my RSS feed and newsletters.  Let’s saddle up and enjoy the ride.

Succession – Planning for the Future

One of the key components of succession planning is deciding where the business should be going and who is going to provide the necessary leadership. This process is a double edged sword. It involves planning for both owners as well as the business. Things can get pretty emotional in family-owned businesses. Accordingly, it is very important to make sure the planning process gets done properly.The emotional process is what stalls many initiatives. It is critical to have a skilled outsider to help to balance the emotions, personalities, and politics of the family-owned business. An objective facilitator with no stake in the outcome dramatically increases your chances of success.

Organizational planning combines development of ownership plans with strategic planning for the business. Achieving balance between these two plans is the key ingredient. This function is where facilitators can earn their money. They balance management interests with ownership goals and the board. Many family-owned businesses don’t have a formal board of directors’ function. We think that boards provide a balance point between owners and management. The board provides a key role in providing continuity between business strategy and long-term vision that helps to preserve owner’s value.

When owners and the business look to the future, the shareholders have to ask the following questions:
• Where do we want to be in 5 to 10 years?
• Can the business survive without the founder?
• What are the goals of non-family team members, entrepreneur owners, and family of the entrepreneur?
• What are the strengths, weaknesses, opportunities, and threats associated with this business?

It is amazing how many family-owned businesses haven’t developed a succession and transition planning process. A well-designed and systematic succession planning process focusing on the family, management, and the organization of the business pays big dividends. This represents a huge opportunity for family-owned businesses to step up and do what they need to do. Planning for the future pays off.

Family-Owned Business (Family Planning)

There are tons of issues and challenges associated with succession planning. Most family businesses want the family to be involved with the business. This gets tricky when there is more than one child and even worse when spouses and cousins are thrown into the mix. Another component of the process relates to non-family managers involved in the business. They have a stake in the business and usually represent a critical link to the future success of the business.

There are many stories about fights and disputes that arise when family members get side ways over the selection of who is in charge. Without an effective planning and communication process, you open the door for lawsuits and fighting between family members. It doesn’t need to be that difficult when the succession and transition process is handled properly from the beginning. We use an approach that sets the stage for proper evaluation of both involved family members and non-family member managers. Our methodology makes a clear distinction between owners, boards, and management. This is done at the beginning and family owner plans are developed and shared with management in an effort to achieve agreement on how to move forward in a balanced fashion. Owners have a role separate from management and it should not be mixed with management responsibilities. These are separate roles and responsibilities. Open communication amoung family members is critical as they reach consensus on ownership goals and on the direction of the business.

One of the major obstacles to succession is the failure of entrepreneur owners to give up control of the company. This often is an attitude of denial and deceit relative to their own mortality. Once founders realize that it is healthy for them to move out of the center of the circle, we start to see progress. The lack of an effective ownership transition plan could be fatal if something unforeseen happens to the founder.

Our process involves family and non-family members in a positive fashion. By fostering effective communication, the business can focus on the right things and achieve a smooth transition. The failure to engage in this critical planning and communication process can prove fatal to the business. Maintaining a balance between all family owners and non-family management is the best way to secure a successful future and build the value of the business.