Summary of Podcast on EP 28 - Estate Planning and ESOPs: Interview with Agnes Gregory (Tax Partner) and Justin Stemple (ESOP Attorney) - The Grid Wiki

EP 28 - Estate Planning and ESOPs: Interview with Agnes Gregory (Tax Partner) and Justin Stemple (ESOP Attorney)

Journey to an ESOP & Beyond

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| October 11, 2024

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When should a business owner start succession planning?Will all of my employees become owners if I sell the business to them?What advice do business owners who sold to third parties have to offer me?

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This episode is especially timely given potential changes to the estate tax. Agnes Gregory of the Berman Hopkins CPA tax team in Orlando, Florida, and Justin Stemple of Warner Norcross + Judd in Grand Rapids, Michigan, explain why it is important to have an estate and gift tax plan in place before entering into an Employee Stock Ownership Plan (ESOP) transaction. They discuss key estate-planning considerations, including lifetime exemptions, other assets, and how the valuation of a business can clarify the broader planning picture.

The conversation emphasizes that estate and gift tax planning should begin as early as possible, especially for owners exploring ESOP Planning and the Benefits of an ESOP or Advantages of an ESOP. Agnes and Justin also discuss who should be involved in this type of planning and how ESOP Advisory and professional ESOP Advisory Services can help owners coordinate their tax, legal, and financial strategies as they continue their journey to an ESOP.

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About Journey to an ESOP & Beyond

ESOPs are gaining traction. In the "Journey to an ESOP & Beyond” podcast, Phillip Hayes explains the process of the ESOP transaction and addresses ESOPs from a business owner’s perspective. The "ESOP Guy" illuminates the simplicity of ESOPs as he debunks common misconceptions that ESOPs are immensely costly and complicated.

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October 11, 2024 [0:09] Hey everyone this is the ESOP guy we are on a journey to an ESOP and Beyond we are in our fifth season and super excited about this topic today I'm probably super excited about every topic but this 1 particular because there isn't a lot of information out there as it relates to esops and Estate Planning and so today we're going to do is we're going to talk a lot about how those 2 things fit together really nicely and sometimes because in an ESOP transaction everybody's really focused on the transaction it may be something you want to slow down and think about this other side of things that will be super helpful so that's what we're going to talk about today to do that I've invited 2 experts on the podcast 1 Estate Planning and then 1 esops and so we're going to introduce them um literally right now so um Agnes Gregory with our firm Berman Hopkins out of the Orlando area um Agnes welcome to the podcast. Thanks for having me Philand Justin stemple out of Grand Rapids Michigan with Warner Norcross and is it Judd. [1:13] It is John can't forget John thanks for having me Justin's in Michigan I and um Justin's all about East esops from an estate but not from estate tax but from an ESOP attorney standpoint so thank you guys for showing up before we jump into the topic um just kind of like briefly introduce yourself Agnes and Justin kind of well I'll start with Agnes and um part of your induction is is tell us what your favorite movie is. And why and we'll move through that and go from there. Thank you um so um Agnes Gregory been with Berman Hopkins for 4 years now spent about 20 years doing tax Consulting here in, Central Florida for all sorts of different businesses manufacturing construction all sorts of different things um I had a bar estate tax planning practice and. My favorite movie you're throwing me off because I don't watch a whole lot of movies um probably the Terminator series seems like it's it's the AI is happening now so it's kind of just an interesting little. [2:12] Twist there, I will be back cool great exactly why is it Terminator what was the is it because you like the AI its AI yeah it's it's AI, we're doomed then then that's all gosh I hope thatall right Justinintro Justin yeah Justin sample uh and Rissa attorney H just celebrated my 20th anniversary uh at Warner Norcross so get to say now I have Decades of experience in the space which I'm not sure I like but I can say that now um do primarily ESOP work that's majority of my practice representing companies implementing new esops representing trustees. Implementing new esops or selling ESOP companies as well. Uh favorite movie I'm gonna so we're starting to get into holiday season or Halloween movies then we'll have Christmas movies I'm going to go with elf the opposite of the Terminator series but just a good feel-good movie and probably the best Christmas movie you can come up with. Oh I can't I can't disagree that is phenomenal. [3:11] Well that's really a great spectrum of of T you know types of movies and whatnot but I think it does the attorney to come up with the Terminator Series right but exactly I guess this is gonna be great I'll be the bad guy and you could be the good guy I was expecting the officer right so no that's great. Uh well thank you guys for coming on and and as I I've explained kind of the topic as we started um there is as we kind of lay the groundwork for the topic there is a lot. Related to Estate Planning and as of course in ESOP and so the way I would kind of. Connected to initially is that of course the ESOP transaction is this milestone. Um of an event where the company's owner or owners is looking now to um start to kind of take some off you know either they're taking chips off the table from the company or they're going to go ahead and outright sell the company and that's going to create. Possibly some liquidity but definitely converting that asset that they had that was in their net worth from uh shares of stock. Into either uh just liquidity or you know just a promissory note. Um so so it gets us thinking about the transfer of that property eventually now to their heirs and so kind of the idea behind. [4:24] Any kind of planning I would I would just say is that it's always better to do this you know in advance just like if I'm planning an ESOP or I'm planning an estate it's helpful to kind of think about this in advance so the so the value I think of this topic today, is just to get everybody thinking about this as maybe something you want to do in conjunction with your uh potential ESOP or sell of your sale of your company. So so that's kind of the foundation as we as we kick it off um let's talk a little bit about the idea of like. What what are the issues related to this is more for Agnes um. That people have to think about what their estate plan I mean if they don't do any estate planning what what are the bad things that can happen to them. [5:04] Um well 1 thing is just leaving your ears in the situation where they have they have a lot to deal with right so. You're gone that's emotionally that's tough to deal with but afterwards the ramification of that so it's it's are you set up for properly for passing your assets down or your air is going to be hitting the courts basically just to get get your assets so proper planning will kind of just help ease your errors into. [5:32] The situation basically um so setting up proper trusts that's important keep things out of probate and let us also big deal because most of our clients and most of you guys's clients I'm sure as well they have a a mess some wealth. And the probate process is a very public process so most of our clients like to kind of keep keep things a little bit maybe on the the quieter side they don't need their neighbor everybody else knowing the net worth and keeping things out of the court system. And keeping things out of probate is is very important to dono that's for sure and then part of part of that too would be just. Taking advantage of um the lifetime exemptions you want to talk about that sure starting with the taxes are going to be eventually. Sure so our current exemption is roughly and that's per person so you're able to either gift during your life time 30 million or if you happen to pass away you have 13 million dollars of exemptions to use against your assets the value of your assets upon your death. Anything above that amount is taxed it's the estate tax and the rate is quite high it's 40% so. [6:42] It's significant so proper planning can also either set you up to where you have eliminated a lot of those estate taxes or at least reduce it and we have all sorts of different techniques to do that from discounting to, all sorts of different things but yes taking advantage of the estate tax exemptions quite important um specially right now that exemption is due to decrease at the end of 2025 to about half of that most most people believe it will be probably 6 to 7 million dollars per person so being able to take advantage of that at least for next year and a half is key um if you're able to structure things correctly do some gifting maybe some charitable giving we can get your estate tax issue kind of under control and use up that exemption. [7:28] So kind of to to jump on just inside now it's the kind of thing about now the esops coming you know you have you have a lot of different um elements here but we have just think about like a company or an owner thinking hey I'm going to do a transaction either this year or next year um what should they be thinking about you know from a basic standpoint. Regarding estate planning or gift planning kind of what kind of using these kind of connecting um with what Agnes said with Pro you know obviously avoiding probate but also you know dealing with the dreaded possibility of of, um a possible biggest state tax percentage. [8:03] Yeah I mean if you're in a transaction situation where you're looking at a year or 2 you know you may be a bit late to do meaningfully meaningful gifting um depending on where your exemptions at but we certainly see everything Agnes just talked about play out in ESOP transactions we'll have sellers that hold their shares in trust so they've already taken care of their estate planning through the trust and the trust is the 1 actually selling so the trust is being funded through the sale uh to the ESOP or kids that are holding chairs you know errors that are holding chairs through the gifting that's already been completed probably at a much lower level so if you're if your timelines longer going through that planning process sets you up even better for when you go into the sale. Process sometimes you might get stuck in a position where you can't do a lot going into the sale if it's going to happen you know in the next year or so um. But what we do see you know a couple of things 1 would be um. An idea of charitable giving as well so not just gifting on estate planning basis but maybe as charitable giving going to be part of your. Process we could talk about how that might look um as well or do you potentially have the ability to, give some shares prior to the transaction or after the gift some of the proceeds of the sale after the transaction and I think you've talked about different transaction structures and other podcasts and if you have things like warrants as part of the proceeds of your sale. [9:23] Closing of the dot transactions those have very very low value, and you can have a lot of warrants transferred under that gift exemption that hopefully will grow into much more significant amounts by the time they pay out so I see if you're sort of haven't done any planning you're about to do an ESOP transaction those warrants might be a much more valuable tool for your estate planning than doing any gifting prior to the transaction. I mean that's a really cool point we can we can dig into a little bit deeper and a little bit later but um because a lot of people are like what a warrant and all that so we'll come back to that a little bit um as we talk about the charitable giving. [9:59] Um 1 of the things that you know that has to be on people's minds is like first off you know how do you assess. What your State's worth first off when you think about it because the first off like I think 1 of the thing about esops is that we start to Value what this business is really worth and a lot of times the company has the the owner hasn't really thought about that much because they've been kind of like just kicking the can like I'm going to do this eventually and and then they start the process and then they realize oh that's where this company's worth you know a lot of money and that's my state right so that kind of starts to define the value of their estate and then we're like okay now from that point you know what do we do with that so when we go back to the lifetime exemptions um but I'm kind of going backwards a little bit. I think sometimes people are really confused like who should I be talking about like to this right like I think that kind of like I've I've heard that from people because there's a little bit of like a confusion when it comes to estate planning. Um like is it your CPA is it your estate attorney you know and then we have the uh all the all the ESOP professionals because I I want to kind of get people a roadmap but if they haven't done anything you know how do you get started with um the next the very beginning steps of that so how would you guys answer that I mean and either 1 of you guys can kind of get to that part of it. [11:20] Yeah I think for me if I was going to say I'd ask the first question would be sort of where are you in a timeline of a potential sale right so um Agnes can speak to a state. Planning and kind of gifting valuations they look quite a bit different than what we would expect to see for an ESOP transaction they have different purposes you have different motivations from evaluation standpoint and um that can cause a little bit of a a disconnect if you're going to use an estate value for gifting a year before you go down and and do an ESOP transaction so if you're close to an ESOP transaction you know then you might be looking at other gifting structures and strategies if you're thinking you know 3 5 years down the road there might be a sale. You know then I think you're starting more with Agnes um and estate planners on how you might handle some gifting in advance. [12:07] Yeah I I agree um the valuations when we're talking about for gifting purposes it's you know the irs's position is it's it's whatever William buyer and and seller are willing to agree on as as far as price is concerned but if you think about it you don't have a willing buyer and seller right so what you're going to do is get a valuation and that valuation is going to determine. Partially what your estate is worth um a lot of times because we don't have a third-party seller that valuations a little bit subjective so we can get discounts and therefore non-voting interest minority shares lack of marketability all sorts of different things in there, the issue with it is if you do that valuation then you do some gifting this year and you sell to ESOP next year the RS always has. Hindsight right it's always 2020 and there's usually when you're talking about maximizing your value on a transaction or whether that's an ESOP or any other type of transaction that's what you're looking for you're looking for max value. So that valuation is most likely not going to be in line with the valuation for gifting in a state tax purposes and you do want to have a little bit of time between. Gifting at that discounted valueand either these are transaction or on other type of transaction so. We'd like to say it's 3 years that's kind of the rule of thumb is you want to give 3 years between gifting and then a transactionyeah. [13:32] Yeah go ahead sorry Phil I was gonna say to answer your question where to start out with um if you have a good CPA typically that CPA is a great place to start because they're really familiar with your assets right your CPA should be able to pull together your personal balance sheet that says here's what I currently have here's a titling here's here's here's all the things um. If they're familiar with estate planning a firm like ours. We will also kind of walk through what the options are with you so we'll come up with the plan and at that point we we will engage in a state attorney that will help us draft the documents and we'll we'll kind of you know. Kick the tires make sure everybody's in the same page but we typically know our clients very well what their financial positions are so the CPA is usually a good place to start and then obviously the attorneys need to come into that picture as well because we do not draft documents. I think that's that's good advice because I think part of it just what do I go to next and to talk about the valuation a little bit a little bit deeper, um just so people understand that that estate and gift valuation is. You know in valuation Theory it's all about what's the purpose of the valuation when you get down to it when you go through you know if you went through evaluation class you're like if it's is it for a state and gift is it for ESOP and it's not like you're doing. You know like a lot of different things but within the state and gift tax valuation you are going to want to deal with like more of a minority ownership piece that has these significant discounts that are that are. [14:58] Based on on case precedence of that um is going to be acceptable to the IRS because the legal cases behind that support the discounts and so the purpose of that and the structure of that that valuation is not this is completely not completely but as distinctly different in that the ESOP valuation itself. Is is usually going to be a 100% value you're not going to see the type of discounts on an ESOP valuation that you are within the state and gift so my recommendation number 1 and we're talking about this is make sure you start this way early in the process like if that's and if that's not the case. Um I would get I would definitely get a separate estate and gift valuation and support that. [15:39] That is the purpose of that is not for the ESOP part and try to separate those 2 things um in ESOP valuations too there's there's a standard of Independents like you can't you can't use the valuation anyways you have to go through a negotiation process and that has to be a completely independent valuation so I think the the the starting point on this conversation is really making sure those 2 things are are separated um and like and our from I don't do any estate and gift valuations and Agnes knows that I'm like I just don't even want to touch those because I do this this is the kind of work I do and I don't even do independent ESOP valuations we just do valuation to support a transaction so I think that's an important element is you want to stay in Lanes with the providers and the advisers that do that specific work. Um as it goes I think the extended part of that is is at some point. [16:29] People need to know not only the balance sheet but they're going to want to know as we get into the kind of the planning side how much cash are they going to have left over because sometimes people um. May need a lot of money to retire on like and it's coming out of the business and so there's there's a balance there that is is going to be partly from the advisors to show them you know in a transaction setting this is how much you're going to get so the valuation is going to lead the ESOP valuation planning is going to lead to those types of things, that will come back to when we're looking at estate and gift what can they do for their family and so some of that you know obviously if there's a ton of um assets there it's not as big of a deal but when there's not. Then it's a much bigger deal to make sure. That they've planned their retirement well you know in that case so so that's kind of that I could say that's the beginning stages of things of helping people um start to get on the right track of like hey this is the this is what we want to execute. [17:26] When you get now we get into like and I think we have these 2 categories we have 1, that the client has a lot of time they've done a lot of planning the other category is more where we are you know they're in the middle of a transaction or they're going to start a transaction relatively soon um and then they have the option so if we if we kind of boil that down and say we get a client. Who has a lot of assets and really does have an estate tax problem I mean because that's kind of the the if you boil this down and couple that with what we said already which is hey we've got a potential for next year to lose a lot of these exemptions. Um that only makes the the issue a little bit more um. You know not complex but just kind of like the more of a an issue that we have to really start thinking about now. Um now we can kind of talk about some of the things in in as Justin already kind of jumped in with charitable giving um 1 of the things that we are looking for is. Part of the goals and objectives of the of the shareholder or the ownerand when we talk about goals and objectives it could be they're very charitable or they're not so charitable right and so. When we ask those questions and this is kind of back to like you guys um. How important it is is it when you're doing the estate planning and again part of being an ESOP transaction um is to better understand where they want their money to go at the end of the day. [18:46] And it's kind of a yes or no or it's kind of like it's pretty important right I think so I think so um. And also just understanding the ages of of their errors and whatnot is also important because even if if maybe they're not super terrible necessarily um. They can still set up certain types of trust here well trust to where their ends their errors end up with the principle of whatever they gift. [19:12] To a terrible trust but the trust is still getting or the charity is still getting. [19:17] A donation so you still get a tax write out for it so you could have a situation where you know what my kids are in their 20s and 30s I want them to work for the next 15 20 years I don't necessarily want them to have access to to. The funds that I own if something were to happen to me but at the end I I eventually I want them to have something so you can set up certain type of charitable trusts to where they generate a tax deduction for you because it's it's partial donation to a charity but the principle in the end could potentially still go to your ears so there's that's it's very important to understand what their goals are some of it is going to be tax motivated the path that they go down some of it's just going to be. Based on their needs like you said how much do they need to survive on because at at at some point. If you're exited out of a business either you're going to be reinvesting into something else and doing something else which a lot of our clients if they're on the older side is probably not going to be wanting to do that but if they're out at that point then they're kind of on a fixed income for the rest of their lives so we kind of have to budget for that understand what that means to them and then also clients kind of forget. [20:23] I called The Perks of Being a business owner right it's well my my car is paid for I drive the company car maybe they pay for his cell phone maybe they pay for some travel maybe there's some meals that entertainment in there that they're you know are kind of on the borderline of yes it's business but I'm also enjoying thisum multi. [20:41] Purpose types of expenses that that may not be thereafter a transaction. Um and it's just something that you have to consider because your lifestyle needs to kind of stay whatever you desire to stay at. [20:54] Yeah I think that's I think that's a good point to to unpack the other part with the ages of the kids and the potential for like the perception of the of the. Umthe shareholder who's selling their stock to think about like what do what's the best thing for my kids. Because sometimes you can just dump a bunch of money in the kids' hands and then boom they blow it for whatever you know and you don't want to ruin your children with this right you want to really bless them with. With that potential transfer of wealth so how how have you seen that done Justin as as far as answering those types of issues or questions at the front end. [21:30] Yeah well it might even reaction to What Agnes was going through is that this combination of estate planning which is very complicated and has a lot of different trust options and esops which are also can be structured in a lot of different ways there's just a lot of planning so it's more about being intentional with your client because it's not a commodity right you need to figure out what their what their goals are and and with a business owner. [21:51] We see so many. Formerly family-owned businesses go down the ESOP route right the the business is 1 of the kids but there aren't kids running the business or maybe there are a few in the business and a few out of the business and how do you balance out what those proceeds are going to be um and there's not a 1 size fit it's all solution for that um and every even if we saw you know Agnes and I looked at 2 individuals with family that kind of look in the same situation. [22:18] What they think is fair and what they want to accomplish could be wildly different um so it's really I do think it's an important planning item and I think it is good to get that. Somewhat ahead of the ESOP transaction because an ESOP transactions overwhelming on its own and it's really hard to keep people focused and digesting the volume of of information and decision-making that they have to make if you can kind of figure out a little bit more on the estate planning while you've got a little bit of timeline. Before you go to implement an ESOP I think that really helps you be thoughtful versus I've got 6 months or 3 months to make just a myriad of of decisions that could have huge tax results in family Dynamic results. [22:59] Yeah and I think that's part part of our are just today too it's like to encourage people to start sooner than later and I think I've said that a million times with just esops in general but I think it's the same thing because you have more options when you get down to it you know last year we we closed a transaction and the the owner of the company was 91. [23:17] And it's like okay well you know he's done a lot of other stuff he's already done a lot of estate tax Planning by the way but at the same time the ownership the stock itself was still stuck here and and there's another element to the the plan so obviously that's that's super important um within the ESOP I think 1 of the things that stood out to us what Agnes was saying is you have um these perks and things with an ESOP there is a lot of flexibility when it comes down to the transition of that owner so a lot of times they're going to just stay on with the company and and maybe serve that role for a while um it really more depends on the succession plan in terms of, if they're really ready to exit but typically you're going to have that that be a little bit more of a a longer period of time than a shorter period of time um based on just the way clients look at this you know they're just phasing into that um so 1 thing I wanted to kind of ask questions about too is just and this is Mo mostly just getting kind of the lay of land when we talk about trusts when it comes to estate planning um. Agnes what what are the primary like I mean this is a hard question because there's probably just so much so many nuances to trust themselves but what are the primary ones that you would say people gravitate to we talked about the terrible Marine remainder trust and they just kind of like a quick definition like what that 1 is compared to a different type of trust. [24:39] I think it really depends on the goals of the clients um. There's a whole multitude of different types of terrible trusts um I don't necessarily want to go through all the details of that but outside of terrible giving the 2 main groups of trusts are going to be revocable trusts or irrevocable work trustsum the revocable trusts living trusts oops I think we just lost Justin. Maybe come back in yeahthose are what we set up for the purpose of just, ease of transfer to the Next Generation they're not really providing you anything as far as Library protection or discounting or gifting or anything it's just there so that. If something happens to an individual then their ears aren't scrambling trying to you know either protect their assets or or get their assets or figure out what they have it kind of. A plan in in front ofthe beneficiaries and the trustees I said this is exactly what I want to happen to my my assets and you kind of just follow that plan irrevocable trust solo but different um they are what they sound like so they're irrevocable so that is a document that's created that basically lays out what you would like your assets inside of that trust to do um but you're kind of stuck with that right so once your local World trust is created once you make those gifts into the trust and fund that it's it's. For the most part. [26:01] Not changeable right it's not correct and they're completed gifts and those types of trusts are what we use a lot of the times to either. Um facilitate transactions now to where we're locking in values of whether that's a business or any other type of Assets Now. So that appreciation is out of an individual's estate um that's a big 1 so it just really depends on the size of the estate of as far as what direction we take but those are the 2 big groups it's either it's a revocable trust or an irrevocable trust. [26:32] And then there's several different types of each as well. Yeah and I and I think I you know not to try to get too deep because I know it'srelatively complicated you know when you get down to um what direction you choose so it's like that I think it keeps coming back the same thing you have to have people, that can help walk through those types of things um so when we think about the charitable giving portion that um Justin had referenced earlier it's this idea that you can actually put um part of the value of what the what the shareholder gets out of an ESOP transaction. [27:07] Is the value of the company and if you have financing you get some liquidity so you do get some of that cash but in addition to that you're going to have a seller note and the seller note is going to have an attachment to it which is called warrants and the warrants themselves are going to have at the very beginning are going to be very very. Um low in value because the value of the warrant coming out of the transaction is going to be based on the day to price meaning that the day 1 valuation was what was negotiated what was transacted and then the day 2 price is after that done then all of the debt of of the of the transaction itself is put onto the company and so the company's valuation um as it relates to the warrants are going to start give us a starting point that is much much lower in um what those warrants are worth so having those go into the trust. At that point um gives a much lower value and a lot I'm I'm kind of guessing on this um but basically allows us to put those into um the trust at a lower value so that we can not use up. Um as much of our. [28:17] Lifetime givingright which in that particular scenario we would want to use an Eero local trust so that it's out of the individuals a state that's now inside of the trust and then any appreciation that happens after the fact will be inside of the trust, um there's also different techniques for if you're you are Cheryl boy incline part of what you could do is set up a trust prior to the transaction a chair will trust or or some kind of a a gift to charity whatnot and do it prior to the transaction and then. Donate some of your stocks before the transaction because what that does is your donation that you're going to get which is your your tax deduction basically for the donation is going to be based on the fair market value of. The stock whatever that is that value is for the ESL purposes so you're getting a full deduction for that fair market valueversus having to. [29:09] Go through a transaction sell to dop and then take a piece of your proceeds and say okay now I'm going to donate it to charity because at that point you're also picking up the game so we would like to. Usually works out better if that is done on the. But the front end of it to where you're making that donation before the transaction not that it can't be done after not that you can't you know do something with the proceeds whether it's give it to Charities set up a uh Donor advised funds do do whatever you like but it's just doing it in the front end sometimes get you a little bit better results. So if you if you donate some of the stock what we're talking about is donating a minority portion which you get the minority discount. [29:46] And therefore what you said I can repeat it but what you said is basically we wouldn't be um hit with the capital gains tax on the sale, stock and then now we net out that piece and then that piece goes into the trust so you're kind of avoiding that whole that whole issue at the front end so yeah that makes a ton of sense and then in order to do that you have to this is where I think the valuation kind of becomes a question you have to have an estate and gift valuation to support that that gift to the charitable Trust. [30:16] Is that how it works or you're you have a third-party trans a third-party transaction at that point where you have something to base base that value on that's truly. [30:27] A transaction versus just evaluation so where I've seen it is is using the value from the the ESOP transaction. Okay so we're just gonna so the IRS is going to want to know and see that as opposed to umlooking at it from just the a prior evaluation or whatever they're going to want to transaction and yeah they're just to jump it on there there are some you know there's an IRS form that has to be submitted and you know kind of signed off on that value that would need to be independent from the ESOP appraisal but typically does sort of aligned with what the negotiated value would have been and and there's a little bit of you know there's some. Documentation that needs to be done in advance you know it has to be a gift that isn't committed to be part of these up sales so it's kind of interesting process to work through with these foundations um that do this sort of work. But uh but yeah certainly can be done and pretty powerful from a tax tax perspective and I apologize for the disruption there I lost internet in my office so I jumped on on my phone. [31:22] Yeah we're flexible so that's cool I'm glad I was like what happened to Justin but that's cool um. On on the stuff between so so 1 of the things we got into Justin was this like pre. Transaction contribution versus post-transaction contribution how have you seen it done mostly I because it sounds like it's a lot more advantageous to do it before the transaction. [31:43] Yeah for the reasons Agnes said I when I see donations um to for charitable purposes I often see them being done in advance of the sale to avoid the capital gains tax um and to go ahead and get those um that extra benefit to the foundation at the end of the day you're trying to give charitably the less tax you pay and you're able to give more um the better on the flip side I I tend to see the warrant gifting happening within Estate Planning and really trying to use that and set that up for future value kind of to the point you made earlier you know the kids might still be working you may want them to keep working the warrant is not going to pay off for 5 to 10 years so you're creating a nice Nest Egg very very gift efficient tax efficient from that standpoint but the payoff is is down the road more and most Charities don't want necessarily to hold a stream of income with a seller note or a warrant you know they'd rather have cash to deploy to the charitable needs. [32:37] That's cool yeah um now we yeah when you had jumped off we talked a little bit deeper about the warrants and just I gave a little color to like the idea of what the warrants really were, so people could understand that if they haven't heard that before great wonderful um, what if you Google esops in estate planning 1 of the things you're going to come up with is how to use the 1042 um to eliminate. You know the capital gains tax so you're basically putting the um the 1042 will will defer capital gains tax on a transaction in the event that the company is an existing Corporation and then from there the the qrp or the the qualified replacement property account whatever the value of that is is going to be deferred until the um if it doesn't get touched. So I'm kind of throwing that out with this idea of estate planning then eventually those um. [33:32] The taxes paid are going to go away so how how how would you address that Justin in this conversation as it relates to estate planning. [33:39] You know that's certainly the Topline item right when you when you think about esops in estate planning because it's it's so powerful I don't think it really changes potentially the directions that we've talked about as far as getting your assets in the right great place from an estate planning perspective in advance from potentially donating shares to a foundation that might be included in the sale or gifting warrants post-closing I don't really think that changes much um. You wouldn't want to uh transfer dispose of that qualified replacement property post-closing and and Trigger that capital gains tax if you did the 1042 certainly but the warrants would still be there um your cash proceeds would still be there uh for gifting purposes so you you certainly if you're going down the 1042 path. That's most of most Paramount you don't want to uh you don't want to disrupt any of that tax planningyeah just. Sorry sorry Phil um just to add to that a little bit so if you do have a C corporation prior to the transaction you could set up an LLC to own that C corporation so if you go down that path and the Corp stock is owned by I call it an LLC. You do the sap transaction that LLC can now invested to qualify replacement property right so inside of that particular. [34:57] Entity. It won't trigger anything if if it's already in there right you're not moving it to anybody else you're not doing anything else but you at that point do have the option of gifting some of the LLC interest. So if that planning is done ahead of time to where you're you're placing the stock inside the LLC maybe it's a partnership that's typically how we like to see it um the transaction happens you do the replacement plot property inside of that LLC now it gives you a little bit more opportunity to be able to do some gifting um. And hopefully with the intent of that replacement property is probably going to be worth a whole heck of a lot less. Maybe 1 or 2 years after the transaction than it is 1015 years down the road so you want to do that gifting maybe a little bit sooner than later before you get a whole lot of appreciation. [35:43] Yeah so we're we're and what we're talking about is capital gains tax versus and then in addition to estate tax so we're kind of playing with. Tax Concepts which you know as we get into it people are probably listening saying oh gosh that's a little more complicated than I. Then I get which is fine because that's part of like throwing out some ideas around what can be and I think it comes back to. Um having the right people in place to help you um 1 1 question I had Justin on your side was. How how important is it for as we start thinking about the roles that people play you've got you know the CPA hopefully has experience with the state planning I think that's 1 caveat I would say Agnes to your comment about your CPA sometimes CPAs just don't know a lot about estate planning so make sure they do but the second part is when you do bring in the estate attorneyum how how important Justin is it for them to understand esops if we're trying to do this this kind of. Comp and I would say complicated because it is you got a lot of pieces in the in the puzzle how important would it be for them to be ESOP oriented at least to really get like what's happening in that world. [36:50] You definitely see some overlap between Estate Planning and and ESOP sometimes you know an attorney that practices in both um but I think most importantly is you know have a lot of ESOP attorneys will work with your estate planning attorney because you normally have had that relationship right they've been helping you with some planning along the way they may even be the person that's just an ESOP as a good transition tool for your privately held business and just supporting you know the estate planning attorney with the ESOP process knowing that's the the end goal because you know Agnes talked about all the various Avenues you can go down from an estate planning perspective if that estate planning attorney doesn't know or doesn't understand the ESOP might be the out outcome of the business transition you know they may may miss some of the opportunities that are available to them so I think it's it's good to connect it doesn't need to be 1 individual that can provide all those services but certainly having those kind of artists connected and working together to serve their kind of mutual clients needs is is helpful. [37:48] Yeah I definitely support like having a collaborative planning meetings with everybody involved I think it's the same thing where the the company has it a company attorney but we hire Justin to be the ESOP attorney and you know Justin's not going to do some of the things the company attorney is going to do but we'll collaborate and coordinate like through the transaction you know because there's no sense in repeating the wheel it's just important I think to have the representative advisors that know what they're doing so that it's all set up correctly and it it um doesn't. Conflict with anything else you're trying to do um speaking about the roles of advisors how everybody's got like an investor advisor how how how important is it the investment advisor participate in all this as well in terms of what they're what they're doing in this in the scheme of planning. [38:37] I think they can help give a realistic look at. The potential income stream after a transaction so it is important to get them involved um understand the investment strategy and the risk tolerance of of the the. [38:52] Business owner right. [38:54] Um yeah so 1 thing as we as we get closer to kind of closing out the idea you know I know Justin you've worked with this a while and seen a lot of different things and. [39:04] Agnes you've been mostly on the estate planning side as well um. What sort of things have you guys seen that was maybe particularly an interesting structure or something and we started to talk about using the warrants I thought that was a very interesting. Uh takeaway for people but what would be some things that would be or things that you've seen that might be um peculiar that that you know added some significant value to to uh maybe a company or an owner of a company that had a significant amount of wealth. [39:33] Yeah I think um a piece that I've seen some interesting um and and kind of long lasting benefits has been with some of the the charitable giving of stock so so where I'm at in West Michigan's um you know a very uh kind of religious community as well so we run into a lot of business owners that have sold to an ESOP you know to get back to the community get back to their employees there are also essentially planning to tithe you know 10% of their sale proceeds so significant gifting in some cases and and doing that with the foundation that allows them to set up a Donor advised fund so that then you know it's not just um a a slug of cash going into a foundation that might align with their goals there might actually be a Donor advised fund where they can then help um in retirement. You know support or organizations and causes that they're passionate about and and that's sort of that transition of what am I going to do after I sell am I going to sit on the beach am I gonna start another business venture or what what am I gonna do and that's something where you know they're able to kind of fund some some causes near and dear to their heart um you know with the sale proceeds and I thought that's been been really fun to see play out in the Years following an ESOP sale. [40:41] YeahI think that sometimes people. Start to Envision I think part of the process of doing it is up sometimes is helping them Envision like what is their life after the ESOP look like you know they've done this for a lot of times 30 years they've been doing their business maybe even longer and it's like they looking at that part of the idea of like we can actually do something um. At least for them that they've been they are passionate about or they really care about so that gives them some opportunities to do that meanwhile. You know help to support mitigate the the I like to use the word mitigate mitigate taxes are issues related to. Um what we would technically don't want to just give all our money to the government so that's at least my philosophical opinion but um. I think it's most people feel that way but anyway uh Agnes do you have anything on that or or is from in terms of what you've seen yeah I I agree with Justin I think um, don't advise funds are are great options you don't have to reinvent we write a lot of a lot of our our clients say hey I'm going to go set up my own charity and there's all sorts of headaches and all with that too right it's it's got to follow the rules I got to avoid certain situations so just having a donor advise fund it just makes things so much easier you know you kind of just dump the money in there and then you can. [41:57] For the most part direct which charity goes to and at what point in time meanwhile still getting a charitable deduction right away which is great. Yeah yeah totally well great well I think we're we're kind of at a close any any last words towards people thinking about doing um an ESOP and they're thinking also about the estate plan from you guys just in in general that you would want to leave people with. [42:18] My last thoughts would be plan plan early um plan well, you know esops are great they're 1 of the best things you can do tax planning wise tax saving wise um. [42:31] But just start early start early yep Justinyeah no I think that's I think that's right and then we've touched on you know I don't know how many different advisors and professional groups right that might have a play in all these various strategies and just kind of you know learning what those relationships are what Lane everyone needs to stay in and making sure your team is is collaborating well as you as you go down is is really important for a successful outcome for the business owner. [43:00] I think that's really important um I think for from my perspective too I would agree with both of those things and just in general um this is not you know a podcast episode where you're like I got all the answers and in fact it's almost like hey I really got to start investigating more so I think I would leave the podcast today with just do your homework and look at other sources resources and and definitely be engaging. The questions with your advisors that you already trust and ask those questions early on um you can't I don't think you can start early enough I think the problem with estate tax is it's it's almost like. It's so far in the future that it's like why even deal with that and I think you can't like start early enough and know that it's a real thing and depending on what really happens with those exemptions you know it can it can hit people pretty hard um and then you don't want to be reacting you know you want to be proactive and that's really what this episode was was all about to hopefully trigger some thoughts on that and you know get the ball rolling so um with all that I appreciate Agnes your help in talking about it Justin thank you um and I'm working through some of the. Um just conversations and questions I think you guys were really helpful for everybodygreat to be here appreciate it yes same. [44:19] So with that everybody else thank you for listening check out our website at journey to an ESOP calm you'll find all kinds of other episodes you can always send us a a question if you have it um and with that we're going to look forward to our next step on this journey to an ESOP.

Talk it through.

Talk it through.

EP 28 - Estate Planning and ESOPs: Interview with Agnes Gregory (Tax Partner) and Justin Stemple (ESOP Attorney)

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