Originally from:
Advising Minnesota Corporations and Other Business Organizations - 2nd Edition - Hardcover
Advising Minnesota Corporations and Other Business Organizations - 2nd Edition - Electronic
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CHAPTER 23
LEGAL ISSUES TO BE ADDRESSED
DURING PREINCORPORATION,
INCORPORATION, AND OPERATIONAL PERIODS
§ 23.01 Estate Planning Issues at Formation
The formation of a business entity adds a new asset to each of its
owners' estates. The value of the interest may often be seemingly small
relative to the owner's overall estate. Assuming the enterprise is
successful, however, the business value as an asset can and often does
change very quickly. Addressing estate and gift tax concerns as the
business matures can be substantially more difficult than doing so at
inception. It is therefore prudent to include basic estate planning
considerations among the issues addressed when establishing the
enterprise and to schedule regular estate planning reviews.
Estate and gift issues at the formation of a business need to be
considered in light of a client's overall estate and gift tax situation. The
client's gift and estate tax planning strategy may have an impact on the
appropriate entity chosen to operate a business. This Chapter provides an
overview of some of the estate and gift tax planning issues that may arise
in decisions regarding the choice of business entity.
The duration of the corporation is usually perpetual, but the human
owners of corporations do not have this advantage. Absent other
agreements, the owner's interest in the business will pass to the heirs on
the owner's death. The transfer of the ownership interest is a taxable
event. Each estate is allowed certain deductions and a credit against taxes
which, currently, offsets the taxes against the first $600,000 of net assets
in the taxable estate. Beyond this, the estate is taxed at a graduated rate
which, at the level the tax credit is used up, is 37 percent and goes on up
to 50 percent. In a sizeable business, this tax can be substantial.
Estate and gift planning considerations are addressed here in four
broad categories: initial capitalization of the business, income from the
business, growth and appreciation in the value of the business, and
meeting estate tax obligations. The initial capitalization of the business
will often come from sources with their own estate tax considerations.
Income follows the ownership interest and, for a profitable enterprise,
can lead to the building of the personal estate independently from
changes in the value of the business. The growth and appreciation in the
value of a business is not shared equally by all ownership interests and
can largely be transferred to the heirs without further tax cost. If the
business is the predominate asset in an estate with a substantial estate tax
obligation, it is likely to also be the source of funds needed to meet the
obligation. These four broad considerations are addressed further in the
Sections below.
Roger J. Magnuson is a Partner at Dorsey and Whitney, LLP, where he serves as Head of the National Strategic Litigation Group and has practiced since 1973. He has been recognized as one of the top trial lawyers in the United States by major national and international publications, including Chambers International Guide to American Lawyers, which profiles the top 500 trial lawyers in the United States, Best Lawyers in America, Who's Who in American Law, and Who's Who in America. Mr. Magnuson was also recognized by a Journal of Law and Politics' survey for Judge's Choice "Wins Most Cases."
Some high profile cases that he has litigated include representation of the Florida Senate in the Bush v. Gore election controversy in 2000; and representation of the Plaintiffs in the widely publicized and studied Mall of America case. For several years he has represented, among other persons and entities, the Minnesota Twins and Major League Baseball principals and players in litigation; and has litigated national and local cases in federal and state court venues. He has appealed before the Supreme Court in a number of cases; as well as the Minnesota Supreme Court. He has authored several articles and 7 books.
Richard A. Saliterman is a Principal in Saliternan & Siefferman P.C., a full-service firm in Minneapolis established in 1976. Mr. Saliterman is a leading expert on corporate business matters, and is the author of several publications on business start-ups, franchises, and trademarks. Mr. Saliterman is the former National Judge Advocate for the U.S. Navy League, based in Washington D.C.
Contributing Editor:
Amanda Chang
Contributing Authors:
Alecia Anderson
Seth Back
John Baker
Shannon Berg
Constatin Burachek
Benjamin Carpenter
Ryan Check
Carl Christensen
Peter Fear
Michael Frasier
Aaron Hall
Catherine Hanson
Paul Harman
Amy Ithlan
Michael Kern
Chris Kuhlman
