| Spring 2008 |
|
INFOLETTER
|
 |
 |
 |
Partner's Perspective |
|
Obey the Rules with Family Limited Partnerships
By James M. Bowen, CPA, MT, Tax Partner
With the estate and gift tax environments in their current state of
uncertainty, estate planning professionals continue to rely on tried and true
entities such as Family Limited Partnerships (FLPs) to help clients manage their
assets. FLPs serve as useful estate planning tools that allow taxpayers to
reduce their estates through valuation discounts and to provide increased
creditor protection, continuity of family ownership and family wealth management
opportunities.
In recent years, however, the IRS has challenged the legitimacy of certain
FLPs, frequently citing IRS Code Section 2036(a). FLPs are supposed to be set up
so that their assets are truly separate from the transferor. The IRS has
disallowed the tax advantages of some FLPs—or reduced the valuation discount
applied—because the person who transferred the assets to the FLP actually
retained use or benefit of those assets during his or her lifetime.
FLP Do's & Don'ts
- Do transfer assets intelligently. If the
transferor wants to use the assets during his or her lifetime, they should
be kept outside the FLP.
- Don't give the transferor control of
distributions. FLPs are intended to be at "arm's length" from the
transferor. Consider setting up an LLC as general partner or giving part
of the FLP interests to a charity or unrelated party to ensure "arm's
length" control.
- Do include other family members' assets.
If possible, include assets from more than just one family member. This
reinforces the structure and business purpose of the FLP, and avoids the
appearance that the FLP was solely created as a tax avoidance tool.
- Don't distribute FLP funds to pay expenses.
Ideally, the assets in an FLP should be left to accumulate value.
- Do honor record-keeping formalities.
Treat the FLP as the legitimate business entity it is.
|
Abraham v. Commissioner
For example, the case of Estate of Abraham v. Commissioner illustrates
how the IRS easily disqualified an FLP due to Section 2036(a) issues. In this
case, the guardian of elderly Ida Abraham created an FLP as part of her estate
plan. Her guardian was given sole discretion to use up to 100 percent of the
FLP's income to pay Ida's living expenses—a decision the IRS considered
antithetical to the intended purpose and spirit of an FLP.
The court concluded that the FLP was "merely a testamentary vehicle employed
to shift assets to future generations while maintaining continued right to
benefit from the FLP interests transferred." Chalk one up for the IRS.
Hillgren v. Commissioner
Estate of Hillgren v. Commissioner dealt with the case of Lea Hillgren, an
active but mentally ill woman who relied on her brother, Mark, for financial
assistance and guidance. Lea's FLP included seven parcels of real estate, four
of which were encumbered by a Business Loan Agreement (BLA) between the siblings
and ultimately controlled by Mark.
When Lea died, the IRS disallowed the tax discounts on those parcels,
claiming that even though Mark controlled the FLP, the assets were basically
used to support Lea. Indeed, crucial FLP paperwork wasn't even filed until after
the estate tax challenge began, underscoring the Hillgrens' disregard for the
FLP entity. Chalk another one up for the IRS.
The bottom line? In today's judicial environment, it's important to stay
within the letter of the law regarding gift and estate planning.
If you have questions about how an FLP might work in your estate or gift
plan, please don't hesitate to call me anytime or contact me by email at
jimb@bobermarkey.com.
BMF&C
Managing Employees Across
Generations
By Michael J. Moldvay, CPA,
Senior Manager
 From
Millennials to Matures, there has never been a more diverse
range of employees from different generations all in the
workforce together than there is right now. Managing this
universe effectively is one of the biggest challenges facing
business owners today.
In this article, we take a broad look at these generations—Matures, Baby
Boomers, Generation X and Generation Y (or Millennials)—and their primary
characteristics from a business management perspective. (For the specific years
of each generation, see sidebar.)
Don't Discount Matures
While most Matures are either at or near retirement age, that doesn't make
this generation any less of a factor in today's workforce. To the contrary, a
growing number of Matures are working past the traditional retirement age of 65,
and one in four retirees interviewed in a recent survey said they had returned
to work after retirement.
The biggest management challenge with this generation may be dealing with
some awkwardness when it comes to supervising someone 20 or maybe even 30 years
older than you are. However, Matures can bring valuable experience, wisdom and
insights to the workplace, especially in knowledge industries (like information
technology and consulting) where finding qualified and talented employees is
critical. Employers should encourage Matures to share their wisdom and
experience with younger generations whenever possible.
Baby Boomers: Sheer Numbers
Most members of the huge Baby Boom generation (which numbers about 77
million), especially Early Boomers, grew up as children of Depression- and World
War II-era parents, so they often have a strong work ethic and a "whatever it
takes" mentality to getting the job done.
Boomers in general tend to be less questioning of authority than younger
generations and less flexible in their work styles, but also more loyal to their
employers—they may have watched their parents spend their entire careers with
one company.
Many Boomers rejected technology advances (like PCs, e-mail and cell phones)
initially, but most have come to accept them and understand their value as these
devices have become ubiquitous. Employers can help Boomers overcome discomfort
with technology by providing thorough and ongoing training in any tech tools
they are expected to use.
 Gens
X and Y: The Antithesis
Generation X was first identified as the antithesis of the Baby Boomers. Gen
Xers were considered to be independent, disloyal, skeptical, tech-savvy and
demanding of their employers when it came to flexible work arrangements, career
advancement and work-life balance.
In reality, Gen Xers aren't disloyal, but are cautious about making
commitments to employers after witnessing massive corporate downsizings and
layoffs in the ‘80s and ‘90s. Their loyalties are to their work and their teams,
rather than their companies. They generally like to work independently, with
clear goals and plenty of autonomy, and they crave feedback. They are more
tech-savvy than Baby Boomers, most of them having grown up using computers at a
very young age.
Many Gen Xers want to achieve a proper balance between their personal and
professional lives. Consequently, they absolutely reject rigid authority and
expect their employers to provide flexible work arrangements such as flex time,
telecommuting and casual dress. And they aren't as willing to put in long work
hours (except in short stints).
Generation Y shares many of the same traits as Gen X, but there are a few key
differences. Gen Yers tend to be more team-oriented and to work better in groups
than Gen Xers. They're also good at multi-tasking—many juggled multiple
activities as kids and teens. And they prefer structure in the workplace,
generally acknowledging and respecting positions and titles. This can sometimes
clash with Gen Xers' independence and desire for a hands-off management style.
Your Challenge
As an owner or manager, it's your job to mesh a mixture of employees across
all of these generations into a cohesive and productive staff. While this may be
your biggest human resources challenge, it's one you can't afford to neglect.
Let me know if I can help you assess these issues. I can be reached at the
office by phone or via email at
mikem@bobermarkey.com. BMF&C
|
Defining the Generations |
| There is not a 100 percent
consensus on the exact years defining generations, but most experts would
agree on a generational breakdown similar to this: |
| Matures—This is the generation
of individuals born between 1925 and 1946. |
Baby Boomers—This large group of
individuals is generally defined as those born between 1946 and 1964. It can
be further divided into Early ('46–'55) and Late ('56–'64) Boomers. |
| Generation X—The generation
immediately following the Baby Boom was born between 1965 and 1978. |
Generation Y—Also known as the
Millennials, Gen Y immediately follows Gen X and comprises those born
between 1979 and 1988. |
Can You Limit Rising
Healthcare Costs?
By Cindy S. Johnson,
CPA, CIT, Partner
 The
price of health insurance continues to climb. Though the rate of
increase has slowed, manufacturers and distributors can still
face double-digit annual hikes.
Legislation and market forces may rein in these costs, but it won't happen
soon. The increases have raced far ahead of inflation, making healthcare one of
the top five operating costs for most companies.
|
Consumer-Driven Healthcare Accounts
Employers have choices when it comes to these savings accounts.
Health savings accounts (HSAs) store tax-deferred money
contributed by an employer, employee or both. The money rolls over yearly,
and when used for healthcare it's tax-free. These accounts are paired with a
high-deductible health insurance plan ($1000 per individual per year), which
can lower employee premium costs, and they're fully portable if an employee
changes jobs.
Health reimbursement arrangements (HRAs) are employer-funded
accounts from which employees can draw tax-free to pay deductibles,
copayments and fees for prescription, dental services and other health
expenses. Employers need not commit funds until health expenses are actually
incurred, and the accounts roll over yearly. They are often paired with
high-deductible plans, and they can be portable.
Flexible spending accounts (FSAs) also use pre-tax dollars to pay
a broad range of health-related expenses, but are employee-funded. They can
be used with any health insurance, but not alongside an HSA. They don't roll
over—employees must "use-it-or-lose it"—and they're not portable.
Some small companies may be eligible for medical savings accounts (MSAs),
with roll-over and portability, but with even higher insurance deductible
requirements.
|
|
Consumer-driven healthcare assigns employees greater
responsibility for health choices—and reduces costs significantly. |
Not every company is suffering equally, though. Some have held increases to 7
percent and even 5 percent. How do they do it?
1. They test the market
The health insurance business, dominated by a handful of giants, isn't known
for sharp price competition. But a company that shops carefully can find price
differentials of 20 percent and more for the same levels of service.
Although manufacturers and distributors can cobble together insurance from
different vendors, a single vendor can usually offer better pricing. That's
because large insurance carriers can spread their margin requirements across a
broader line of products.
A comparison of health insurance plans must take many variables into account
— differences in deductibles, coinsurance, copays and benefits, as well as
quality and breadth of service. Does a vendor offer a wellness program? Does it
provide mail order pharmacy service?
2. They support consumer-driven healthcare
This trend is consistent with a widely reported observation: hospital
patients who are interested and engaged in their own care have better recovery
rates.
Consumer-driven healthcare assigns employees greater responsibility for
health choices—and reduces costs significantly. The insurance industry and the
IRS promote it with tax-free and tax-deferred savings options (see box).
Most require employees to maintain high-deductible health insurance policies,
which bring lower premiums, but can cause concern in a workplace accustomed to
low deductibles.
3. They promote wellness
Wellness programs can have dramatic effects. By helping employees change
destructive habits, employers can help them stay healthy—a proven path to
fewer insurance claims.
Plus, wellness is attractive to employees and can offset some of the pain
caused by rising healthcare expenses. For example, no one wants to draw benefits
for heart disease, even generous ones—they'd much rather be healthy.
Disease management programs, meanwhile, provide proactive contact, incentives
and assistance with medical and pharmacy routines. These programs help afflicted
individuals avoid progressing to an acute state.
4. They educate their employees
Communication is critical in times of change, and nowhere is this more true
than in a discussion of health benefits.
The companies that have been most successful in reducing healthcare costs
don't try to shelter employees. "Our insurance costs have risen 35 percent in
three years," they say. "Something has to give."
Then these companies explain their choices. Higher deductibles may chafe, but
lower costs make a stronger company, which means job security. And since workers
share in healthcare costs, they also benefit from savings directly—and
wellness programs sweeten the deal. Insurance carriers and brokers provide
multimedia materials to get these messages across.
Facing unpredictable prices for raw materials and transportation,
manufacturers and distributors are looking far and wide for ways to control
their costs in other areas. Healthcare hasn't been one of those areas, to put it
mildly.
But companies that take the right steps are showing that it's possible, at
least, to hold down healthcare cost increases.
If you'd like to learn about these and other ways to rein in costs, please
call or email me at
cindyj@bobermarkey.com. BMF&C
Valuation Provisions Critical
to Buy-Sell Agreements
By Mark B. Bober, CPA/ABV,
CPA, Partner
 Buy-sell
agreements are standard in most multi-owner, closely held
businesses today. Their primary purpose is simple—to ensure
business continuity if an owner dies, becomes disabled, retires
or otherwise disengages from the business. Most buy-sell
agreements also provide protections for a company and its
ownership group that restrict the transfer of interests to third
parties unless certain specific conditions are met.
While buy-sell agreements often contain detailed information about terms and
funding, they are sometimes less clear in the crucial area of valuation. To
avoid discord, buy-sell agreements should always contain clear and specific
valuation guidance—so when it comes time to sell or redeem an interest, there
are no questions about how it should be done.
How to Set a Price
Because the financial circumstances of a company constantly change, buy-sell
agreements rarely fix a price per share or other specific dollar amount. Rather,
they typically suggest a valuation approach that all parties agree should be
used. Widely used approaches include formulas, negotiation or independent
appraisal.
Formulas—The most common formula suggested in buy-sell agreements is book
value or a derivative thereof. Book value is simple to calculate, and buy-sell
agreements can dictate any adjustments that should be made to book value to
arrive at an agreed-upon formula amount at the date of the triggering event.
A capitalization of earnings approach is also fairly common, although most
buy-sell agreements dictate the use of an average of several years of earnings
to avoid extremes.
Of course, these formulas require use of the company's financial statements
as the basis of valuation, and financial statements often reflect numbers based
on tax-driven business decisions. If suggesting a formula approach, it is
important to recognize and adjust for the limitations of the financial
statements as the basis for the valuation.
Negotiation—Another approach is perhaps the most direct—discussion
and negotiation between owners to arrive at an agreed-upon price. This
discussion is typically held annually, as dictated by the buy-sell agreement,
and covers the price for the following year.
The problem with this approach is that sometimes the owners can't agree on a
value. In this case, it is wise for the buy-sell agreement to dictate what
happens next. The agreement might suggest arbitration, an outside appraisal or
other mechanisms to force a decision.
Independent Appraisal—Many financial experts believe that the most
prudent course of action is to suggest an independent appraisal as the method of
valuation in a buy-sell agreement. The benefits are clear: An independent
appraisal is current. It is based on real business and market conditions. And it
is conducted by a neutral third party with no bias toward one owner or another.
With so much at stake, it is crucial to involve valuation professionals in
the drafting of buy-sell agreements. Together with attorneys and other trusted
advisors, valuation professionals can advise owners on exactly what will work
best in terms of valuation provisions for a specific business.
If you would like to discuss a buy-sell agreement and valuation provisions,
please call or email me at
markb@bobermarkey.com. BMF&C
 |
In this feature of InfoLetter, each quarter we provide a profile of
one of our professionals who is available to work with our clients and
friends.
Tara B. Shulas, CPA, CIT
Manager - Taxation Services |
Tara graduated cum laude from Waynesburg College, in Waynesburg, PA, with a
Bachelor of Business Administration in accounting. Tara has practiced and been
certified in Florida and Ohio. She joined Bober, Markey, Fedorovich & Company in
2003 after relocating to Northeast Ohio. She is currently pursuing a Master of
Taxation from The University of Akron.
With more than 10 years of experience, Tara has worked extensively with
closely held corporations, including professional services and manufacturing
companies, C-Corporations, S-Corporations, individual returns and non-profit
organizations. She also has extensive experience with accounting for income
taxes.
Tara is a member of the American Institute of Certified Public Accountants
and the Ohio Society of Certified Public Accountants and has received her
certification as a Construction Industry Technician. She is a member of the
Order of Eastern Stars and the Social Order of the Beauceant.
"When I moved back to Ohio to be close to my family, I was extremely lucky to
find a caring professional family as well. The various resources that the Firm
offers demonstrate that they not only care about their clients but also my
professional development. Many of the Firm's core values—integrity, commitment
to our community and passion for excellence—mirror my own values and how I
strive to live daily. I am very proud to be part of the Bober, Markey,
Fedorovich & Company family." BMF&C
|
