Thomas M. Boles, 33°, G.C. Director of Development 1761 East Woodcrest Avenue La Habra, California 90631-3260 Tel . 562-691-4227; Fax 562-691-5327

Earl E. Ihle, Jr., 33° Director of Major Gifts 1733 Sixteenth St., Washington, DC 20009–3103 Tel. 202-232-3579, Ext. 143, Fax 202-387-1843 Or call 800-486-3331, Ext. 143 council@srmason-sj.org

This month, we are pleased to have a guest author, Bro. W. Kirk Plunkett, 32°, Valley of Roanoke. Bro. Plunkett is a Financial Advisor for First Union Securities, Roanoke, Virginia, and along with our Development office, he is happy to be of assistance to the Brethren and their families.

While it is important for everyone to have an Estate and Financial Plan, it becomes even more important for those of us who have liquid assets such as collectibles, land, legal and medical practices, or a family business. Liquid assets make planning challenging in regard to proper valuation and the creation of liquidity for payment of estate taxes due nine (9) months after death. Unfortunately, the IRS only accepts cash. In the rest of this discussion, I will focus on the family business owner. Should you feel this does not apply to you, you may still wish to read on as several of the planning techniques may apply to your situation or to someone you know. In certain situations, "creating" a corporation, partnership, or a limited liability company may help to achieve your estate planning objectives, including asset preservation, management, and estate transfer. To discuss these techniques in complete detail in this forum would be inappropriate and difficult. In contrast, the goal of this discussion is to inform my fellow Brethren and their family members how proper estate and financial planning can put you closer in reaching your individual financial goals, no matter how complicated your situation.

With that being said, the first step in planning is to formulate your personal goals, particularly how you picture the progression of your estate. Essentially, who gets what, when, and how much? Generally, business succession is the most important planning objective for the business owner, that is, transferring the business assets to the people the owner wants to inherit the business. Unfortunately, statistics show that 70% of family-owned businesses do not make it to the next generation, while 90% do not make it past two generations.

The next step is to have an inventory of your estate. This includes having the business properly valued. This should not be done by guesswork. It must be calculated with the assistance of advisors who are experienced in this area. Far too many plans fall apart when built on a weak foundation of assumptions and values that cannot be substantiated in the eyes of the IRS.
Once a proper inventory is made, strategies can be formulated to transfer wealth efficiently by reducing estate tax, gift, and generation-skipping taxes. For the most part, we are attempting to reduce the taxable estate valuation by physically removing assets from the estate through an efficient tax-managed gifting program to heirs and charity. Among several planning techniques is the reduction of an asset's value by "freezing" and "discounting" an estate's valuation. Extreme techniques such as "Offshore Trusts" and aggressive planning should only be considered after long deliberation regarding the pros and cons of the specific situation. If a planning strategy has not passed IRS scrutiny or a court judgment (letter ruling), you would be well advised to not use that strategy.

Buy-Sell Agreements are widely accepted and are excellent tools that can be implemented to provide the dollars available to "buy-out" a partner's interest upon death. When properly structured, they can alleviate valuation disputes that can arise among other business owners and can be binding on the IRS for estate-tax purposes. The agreement must have a fair, enforceable, buyout price that is fixed or formulated to produce a fair-market value. Funding for a carefully designed Buy-Sell Agreement will, in most cases, come from life and/or disability insurance. The agreement should also address the payment above and beyond insurance proceeds. These agreements are legally binding contracts and should be drafted by qualified legal counsel, an attorney who specializes in this area of law.

The most common reason for the closely held businesses not progressing to the next generation is the necessity to pay federal estate tax. The Buy-Sell Agreement provides liquidity at death. Other tools exist to help accomplish this as well. One technique is to discount the value of the business by establishing a lifetime gifting strategy. By gifting minority interests, or percentages, of your business to family members over time, you are effectively discounting the valuation of the business. The amount of discount applied is subjective and should be determined with the assistance of qualified professionals. The basis of discounting is built on the fact that a third party is not willing to pay full face value for a business interest that is also partially owned by multiple family members not his own. He would be the third man out so to speak. This tax-managed gifting program can efficiently help a business span several generations.

Yet another gifting technique is to involve the power of a charity's tax-exempt status to assist in the tax-free transfer of wealth. All gifting to a qualified charity, such as the Scottish Rite Foundation, Southern Jurisdiction, USA, is accomplished estate and income tax free. The donor(s) can receive a charitable tax deduction on their income tax return should the gifting be done during their lifetimes. The gift immediately reduces the estate tax liability. Additional planning techniques should be considered so that the wealth given to charity is "recreated" for benefit of the heirs. This tax-wise planning can efficiently assist in transferring wealth to one's heirs.

These are just a few accepted planning ideas that involve asset valuation, discounting, and tax-wise gifting to accomplish one's financial goals. Certainly, more exist. One thing to keep in mind when planning for the future is that there are no guarantees any particular planning technique or combination of them will be forever certain. With the ever-changing tax code and the nature of people to change their minds, what works today may not work tomorrow. It is important to realize that successful estate and financial planning involves the teamwork of professional advisors (CPAs, Estate and Tax Attorneys, Financial Advisors) and family members. Then, once the appropriate plan is implemented, it is important to review your plan periodically and make adjustments as necessary.

Ill. Thomas M. Boles, 33°, G.C. (left in photo) has worked extensively in fund-raising for children's programs throughout our Fraternity. For more information on planned giving, call Bro. Tom at 562–691–4227 (Fax 562–691–5327) or the Scottish Rite Foundation, Southern Jurisdiction, U.S.A., at 202–232–3579, ext. 143. Ill. Earl E. Ihle, Jr., 33°, is our development team's Director of Major Gifts. He has been a member of the Fraternity for 25 years and served in 1978 as Master of Lafayette Lodge, No. 111, Baltimore, Maryland. He is also a member of Boumi Shrine Temple in Baltimore, the York Rite, and a dual member of the Scottish Rite Valleys of Baltimore and Washington, D.C. You can reach Bro. Ihle toll free at 1–800–486–3331, ext. 143.