Keeping It In The Family Resnick Associates
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Transcript of Keeping It In The Family Resnick Associates
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Resnick Associates
NEW YORK STATE CONCRETE MASONRY
ASSOCIATION
November 7, 2008Turning Stone Casino
Verona, NY
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Resnick Associates
CONTACT INFORMATION
Terrance K. Resnick
Resnick Associates
2073 Doral Drive
Harrisburg, PA 17112
(717) 652-2929
(717) 540-5735 fax
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Resnick Associates
Resnick Associates
1. Second Generation Firm – 40+ Years
2. Clientele throughout the United States
3. Extensive involvement with commercial and residential construction business owners
4. Business Trade Associations and Buying Groups
5. Published nationally and regionally
6. Featured in book Streetwise Marketing Plan
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Resnick Associates
SMOOTH SUCCESSION: AVOIDING COMMON TAX AND ESTATE PLANNING
MISTAKES
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Resnick Associates
Important Questions to Ask Yourself
1. Are you working most your life to build your business only to see it eventually lost?
2. Are you aware that approximately 50% of the hours that you’ve worked were put in simply to pay a tax?
3. Are you putting your family in the eventual position
of no longer being on speaking terms?
4. Will your family maintain a healthy revenue flow when you are gone?
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Resnick Associates
Why Do Businesses Fail?• Mismanagement?
• Poor Investments?
• Inefficient Succession/Estate Planning?
WHICH IS THE LEADING CAUSE????
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Resnick Associates
The Answer Is……
INEFFICIENT
SUCCESSION/ESTATE PLANNING!
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Resnick Associates
2 OUT OF EVERY 3 FAMILY BUSINESSES DO NOT MAKE IT FROM THE FOUNDER TO
THE 2ND GENERATION!
• Original Owner Can’t “Let Go”
• Lack of Plan or Inadequate Planning
• The Next Generation is Ill Prepared
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Resnick Associates
IMPORTANCE OF SEPARATING COMPANY
FROM FAMILY• Challenge for Parents: COMMUNICATION
• Family Meetings / Business Meetings
• Board of Directors to Maintain Objectivity
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Resnick Associates
BUSINESS SUCCESSIONPLANNING CHECKLIST
Have These Issues Been Addressed?
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Resnick Associates
Issue #1
Define Personal Goals and Vision for the Transfer of Ownership and Management
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Resnick Associates
Issue #2
Identify Your Successor
If you are a Family Business, is a Family Member the best choice to take over?
Typically the answer is “Yes”, but it should not be automatic – the business must be run as a business first!
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Resnick Associates
Issue #3
The Importance / Unimportance of Family Involvement in Leadership and Ownership of the Company going Forward
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Resnick Associates
Issue #4
Techniques to Reduce or
Eliminate Estate Taxes
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Resnick Associates
Issue #5
Liquidity Positioning to Avoid the Forced Sale of the Company and Provide for Estate Equalization
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Resnick Associates
Issue #6
Buy-Sell Agreements
A. Stock Redemption
B. Cross Purchase
C. Wait and See
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Resnick Associates
Issue #7
Contingency Plan in the Event of Disability
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Resnick Associates
Issue #8
Stock-Transfer Techniques to Help Achieve Succession Goals
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Resnick Associates
Issue #9
Dependency on Business to Meet Retirement Cash Flow Needs
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Resnick Associates
Issue #10
Business Valuation
Is Succession to Family Members
or Outsiders?
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Resnick Associates
Some Leading Causes for Unsuccessful Succession
• No Succession Plan in Place• Unable to Retain Key Execs/Personnel after owner
exits the business• Insufficient Personal Estate Plan – Company left
to Inactive Spouse and/or family members• All siblings (whether active or not) having
ownership in the Company
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Resnick Associates
Coordinating Estate Planning with Succession Planning
• Many Business owners do either/or
• Business is generally the largest asset in the estate of the Business Owner – how does that effect the family and business?
• Limiting Taxes / Transfer Costs
• Providing Liquidity
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Resnick Associates
The Economic Growth and Tax Relief Reconciliation Act of 2001
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Resnick Associates
An Inside Look• Estate Tax
– Reductions Began 1/1/02– Top Marginal Rate Reduced to 50%– Repealed 5% Surtax– Top Rate Decreases 1% per year, Levels at 45%
in 2007-2009• After 12/31/09, Top Gift Tax Rate is top
individual income tax rate (no repeal of Gift Tax)• Year 2010 - FEDERAL ESTATE TAX
REPEALED
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Resnick Associates
THE FACTS OF “REPEAL”
After the 1 Year “Repeal” in 2010, the
Federal Estate Tax Law reverts to 2001 law:
$1,000,000 Gift Tax Exemption
$1,000,000 Estate Tax Exemption
55% Marginal Bracket ($3,000,000 to $10,000,000)
5% Surtax ($10,000,000 to $21,040,000)
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Resnick Associates
Common Goals
• Certainty of Distributions
• Reduce or Eliminate Estate Taxes
• Provide Liquidity – VERY IMPORTANT
• Ensure all Children are Treated Fairly
• Provide for Care of Minors & Disabled
• Preserve Family Business for the Family
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Resnick Associates
Common Mistakes
• Unrecognized Estate Size or Tax Bite
• Lack of Liquidity – VERY IMPORTANT
• Artificially Low Value on Company
• Reliance on Expensive Post Mortem
Planning
• Improperly Arranged Life Insurance
• Lack of Master Game Plan
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Resnick Associates
Common Mistakes (Con’t.)
• Failure to use IRS “Gifts”
• Leave Everything to Spouse
• Improper Use of Jointly Held Property
• Everything Owned by One Spouse
• Will Errors
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Resnick Associates
Revocable or Irrevocable Trust?
Depends on the Planning Purpose
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Resnick Associates
Estate Analysis
Have
Want
Current Plan
?
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Resnick Associates
Property in Your Gross Estate
Cash Investments
Real Estate Tangible Assets
Personal Property Revocable Trusts
Retirement Plans Annuities
Business Interests Life Insurance
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Resnick Associates
Annual Exclusion
• Gifts of up to $12,000 per Year
• Present Interest
• No Tax, No Paperwork
• Joint Gift; $24,000
...Husband and Wife
• College and Medical Expenses Unlimited
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Resnick Associates
Unlimited Marital Deduction
• Dollar for Dollar Deduction on Assets
Transferred to a Spouse
• Outright, Unconditional Transfer or
• Qualifying Trust (GPA or Q-TIP)
...Included in Spouse’s Estate at Death
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Resnick Associates
I Love You Will
Entire Estate is Left to Surviving
Spouse
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Resnick Associates
I Love You WillTax Analysis
Husband WifeTentative Taxable Estate $5,000,000 * $5,500,000
Marital Deduction $5,000,000 $ 0
Taxable Estate $ 0 $5,500,000
Tentative Estate Tax $ 0 $2,460,800
Applicable Credit Amt. $ 0 $ 345,800
Estate Tax Due $ 0 $2,115,000
Total Tax Paid: $2,115,000 *Assumes Assets Appreciate 10%
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Resnick Associates
Problems withI Love You Will Plans
• No Use of Applicable Exclusion Amount
in First Estate
…Failure to Use IRS “Gifts”
• Appreciation of Assets in Second Estate
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Resnick Associates
I Love You WillTax Analysis
Husband WifeTentative Taxable Estate $5,000,000 * $5,500,000
Marital Deduction $5,000,000 $ 0
Taxable Estate $ 0 $5,500,000
Tentative Estate Tax $ 0 $2,460,800
Applicable Credit Amt. $ 0 $ 345,800
Estate Tax Due $ 0 $2,115,000
Total Tax Paid: $2,115,000 *Assumes Assets Appreciate 10%
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Resnick Associates
Exemption Shelter Plan
ESTATE
$1,000,000Everything
Else
Income Spouse
Children
Principal
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Resnick Associates
Exemption Shelter PlanTax Analysis
Husband WifeTentative Taxable Estate $5,000,000 * $4,400,000
Marital Deduction $4,000,000 $ 0
Taxable Estate $1,000,000 $4,400,000
Tentative Estate Tax $ 345,800 $1,932,800
Applicable Credit Amt. $ 345,800 $ 345,800
Estate Tax Due $ 0 $1,587,000
Total Tax Paid: $1,587,000 *Assumes Assets Appreciate 10%
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Resnick Associates
To Achieve Applicable Exclusion Shelter Plan, Avoid
Common Mistakes
• Leave Everything to Spouse
• Improper Use of Jointly Held Property
• Everything Owned by One Spouse
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Resnick Associates
Liquidity Needs In Estate Planning
• Administration Expenses 2-5% of
Gross Estate
• State Death Taxes
• Federal Death Taxes (within 9 months)
…often Deferred to Second Death
• Family Income Needs
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Resnick Associates
Sources of Liquidity
CashLife Insurance
C.D.’s
StocksBonds
Annuities
Business Real Estate Equipment
Liquid
Semi Liquid
Illiquid
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Resnick Associates
METHOD TO PAYCash
• Reduces Total Bequest to Family
• Reduces Funds Family May Need for Current Expenses
• Future Earnings on Funds Gone Forever
• Capital to run Company is Gone
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Resnick Associates
METHOD TO PAYSale of Illiquid Assets
• Reduces Total Bequest to Family
• Complete Loss of Future Income
• Unlikely to Receive Fair Value
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Resnick Associates
METHOD TO PAYLife Insurance
• Pay Estate Taxes with Discounted Dollars
• Death Benefit May Be Estate Tax Free
• Helps Preserve Assets - including the Business
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Resnick Associates
Possible Solution
Via Gifting, Shift Assets to Create Tax Liquidity
ESTATE
$5 millionTrust
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Resnick Associates
What Type• Term• Whole Life• Whole Life / Term Blend• Variable• Universal• Variable Universal• No Lapse Universal• Second to Die
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Resnick Associates
Life Insurance: Powerful or Powerless?
• Assure that you have a Unilateral Contract
• Common Sense: Generally, something is the “cheapest” for a reason
• There are more then 2,000 life insurance companies. There is a wide range in quality –
both company and product.
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Resnick Associates
“I thought Life Insurance was Tax Free”
• Income and Estate Tax Situations
• Ownership of Policy must be set up correctly
• Three Party Contracts
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Resnick Associates
METHOD TO PAYInstallments - Section 6166
• Estate Must Qualify – Business Interest must be at least 35% of overall value
• Payments Due Over 14 Years• Interest only first four years• Principal and Interest over Remaining 10
years• This method typically costs two to three
times the original tax due
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Resnick Associates
Review of Payment Options for $5,000,000 Liability
Option A: $5,000,000 (Cash)
Option B: $5,000,000+ (Sale of Assets)
Option C: Significantly Less (Life Insurance)
Than $5,000,000
Option D: $5,000,000+++ (Section 6166)
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Resnick Associates
Potential Significant Value “Unneeded” Life Insurance Policies
• Certain policies (depending on age, health, and policy status) are very attractive to outside buyers
• Payout to policy owner substantially more than actual cash value
• Most recent example
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Resnick Associates
Valuation Important for Lifetime Gifts and Testamentary Transfers
Fair Market Value
What a Willing Buyer Would
Pay a Willing Seller, Neither Being
under a Compulsion to Buy or Sell
and Both Knowing All Relevant Factors
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Resnick Associates
ValuationIRS Revenue Rulings
Key Ruling - 59-60
EarningsCapacity
Book Value
DividendCapacity
Marketability
Risk CloselyHeld
Market Factor
Publicly Held
Minority Discounts
Control Premium
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Resnick Associates
Buy-Sell Agreements
• Business Owner’s Agreement
• Sale Triggered by Death, Disability, or Retirement
• Guaranteed Purchase of Appropriate Interest by Business or Remaining Owners
Guaranteed Purchase dependent on buyout method
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Resnick Associates
Advantages of a Formal Buy-Sell Agreement
• Surviving Owner maintains Continuity of Ownership and Management
• Decedent’s Estate / Family Converts Unmarketable, Non-Liquid Business Interest to Cash
• Provide Fair and Reasonable Price• Possibly Peg the Value for Federal Estate
Tax Purposes
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Resnick Associates
Business or Surviving Shareholder Required Financial Obligation
$ 2 MILLION BUYOUT AMOUNT
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Resnick Associates
What are the Choices?
• Sinking Fund
• Borrowing
• Installment Method
• Life Insurance
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Resnick Associates
What are the Costs for each method?
• SINKING FUND - $2,000,000
• BORROWING - More than $2,000,000
• INSTALLMENTS - More than $2,000,000
• LIFE INSURANCE - Significantly Less Than $2,000,000
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Resnick Associates
Case StudyF&F, Inc.
• Fred and Freda are equal owners of F&F, Inc. – a profitable S Corporation
• F&F, Inc. valued at $4,000,000• Buy-Sell Agreement requires surviving
owner to purchase deceased owner’s interest for $2,000,000 under an installment contract payable over 10 years PLUS interest
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Resnick Associates
Installment Method Overview
• Installment payments are NOT deductible by F&F, Inc.
• Fred and Freda both in 40% marginal federal and state tax bracket (no corporate tax)
• F&F, Inc. operates on profit margin of 10% for every dollar of sale
• Annual Payments are $200,000 (not including interest)
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Resnick Associates
Installment MethodTrue Cost
• Annual Installment Payment is $200,000 (not including interest)
• Surviving Owner has to earn over $330,000 in income to net $200,000 in a 40% marginal federal and state tax bracket
• To earn $330,000, the surviving owner has to generate annual sales of $3,300,000, which is $33,000,000 over the ten year installment period!
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Resnick Associates
Installment Method Issues
• Could either surviving owner generate enough profit to pay the installment obligation AND still earn a good income for his or her personal needs?
• Will the death of an owner have a negative impact on sales? How is that going to be made up?
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Resnick Associates
Installment Method IssuesContinued
• Will the survivor have to hire someone to take over the responsibilities of the deceased owner? Where is the cash flow coming for this? How much more is needed?
• Will the installment obligation affect the ability of the Company to pay salaries, borrow money or expand or fulfill other business purposes?
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Resnick Associates
What Happens…..
• To existing company debt when one owner is deceased or out of the business because of a disability?
• If the company or surviving owner becomes insolvent during the installment period?
• If the surviving owner dies or becomes disabled during the installment period?
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Resnick Associates
Types of Buy-Sell Plans
• Stock Redemption
• Cross Purchase
• Wait and See
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Resnick Associates
Key ComponentsBuy-Sell Agreement
• Language that addresses all contingencies
• Valuation
• Funding
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Resnick Associates
Stock Redemption Plan
• “A” and “B” Form Corporation & Each
Contributes $100,000• 10 Years Later Corporation is Worth $4,000,000• “A” and “B” Enter Into a Stock Redemption
Agreement• Corporation Becomes Owner and Beneficiary of
$2,000,000 Policy on Both “A” and “B”
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Resnick Associates
Stock Redemption Plan
“A” Dies:
• $2,000,000 Death Benefit is Paid to the Corporation
• Corporation pays $2,000,000 to “A”s Estate• “A”s Estate Redeems Stock Back to Corporation• “B”s Stock is Now Worth $4,000,000 (Same # Shares, Twice the Value)
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Resnick Associates
Stock Redemption Plan
• “B” Decides to Retire and Sell Corporation for $4,000,000
• “B” Must Pay Capital Gains taxes on $3,900,000 ($4,000,000 Minus Original Cost Basis of $100,000)
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Resnick Associates
Cross Purchase Plan
• “A” and “B” Form Corporation & Each
Contributes $100,000
• 10 Years Later Corporation is Worth $4,000,000
• “A” and “B” Enter Into Cross Purchase Plan
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Resnick Associates
Cross Purchase Plan
• “A” is Owner and Beneficiary of $2,000,000 Policy on “B”
• “B” is Owner and Beneficiary of $2,000,000 Policy on “A”
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Resnick Associates
Cross Purchase Plan
“A” Dies:
• “B” is Paid $2,000,000 from Policy on “A”s Life
• “B” Pays “A”s Estate $2,000,000 for “A”s Stock
• “B” now Owns $4,000,000 of Company Stock
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Resnick Associates
Cross Purchase Plan
• “B” Decides to Retire and Sell Corporation for $4,000,000
• Since “B” bought “A”s Stock for $2,000,000 and had $100,000 Original Basis…
• …”B” Pays Capital Gains Taxes on $1,900,000
• RESULT…. Tax Savings on $2,000,000
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Resnick Associates
SPECIAL CASE STUDY
CONCRETE MASONRY, INC.
SUCCESSION PLAN
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Resnick Associates
Facts• Louie and Louise Young (Husband and Wife)
Ages 63 and 61, Respectively• Three Children:
Joe, Age 31 and Unmarried Moe, Age 28 and Married to Nora Helena, Age 25 and Married to Ken• Louie, Louise, Joe, Moe each own 25%• Fair Market Value of CMI, Inc. is $5,000,000• Louie and Louise Estate Valued at $7,000,000
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Resnick Associates
Current Plan
• Louie and Louise have I Love You Wills
• At Second Death, Estate is Distributed Equally among the Three Children
• There is no Buy-Sell Agreement
• Moe and Helena have I Love You Wills
• Joe does not have a Will
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Resnick Associates
Goals
• Distribute the Estate Fairly Upon the Last to Die of Louie and Louise
• Assure that CMI is Run by the Two Sons Who are Active in the Business
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Resnick Associates
Possible Results of Current Plan after Death
Louise
25 Shares
Louie
25 Shares
Joe
42 Shares
$500,000
Moe
42 Shares
$500,000
Helena
16 Shares
$500,000
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Resnick Associates
Possible Results of Current Plan
At Moe’s Subsequent Death
Moe
Joe
42 Shares
Helena
16 Shares
Nora
42 Shares
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Resnick Associates
Possible Results of Current Plan at Moe’s Subsequent
Death
• Nora and Helena May Sell CMI to Strangers/Competitors
• Joe May Lose Control of CMI
• Who is Running CMI?
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Resnick Associates
Solutions/Step-OneCross Purchase Agreement
I Love You Will/Exemption Shelter
LouiseLouie Brothers Purchase Shares at Second Death
Cross Purchase
Joe Moe
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Resnick Associates
Solution/Step TwoContingent Beneficiary
• After Sons Buy Shares, Estate Has $5,000,000 in Newly Created Liquid Assets
• Parents now Have the Ability to Increase Cash Distribution to Helena
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Resnick Associates
Possible Results/New PlanCross Purchase Agreement
LouiseLouiePurchased Shares at Second Death
Cross Purchase
Joe Moe
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Resnick Associates
Possible Solution Totals
Joe
$1,500,000
50 Shares
Moe
$1,500,000
50 Shares
Helena
$4,000,000
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Resnick Associates
QUESTIONNAIRE
Questionnaire may be completed and handed in or returned via fax or mail
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Resnick Associates
CONTACT INFORMATION
Terrance K. Resnick
Resnick Associates
2073 Doral Drive
Harrisburg, PA 17112
(717) 652-2929
(717) 540-5735 fax