It comes down to this…

The success you have enjoyed has created a problem that will someday become very real for those you care

about.

Succession PlanningSuccession Planning

TaxesTaxes

Federal Estate TaxFederal Estate Tax Oregon Inheritance Oregon Inheritance

TaxTax

Ownership StructuresOwnership Structures

Sole ProprietorSole Proprietor General PartnershipGeneral Partnership ““C” CorporationsC” Corporations ““S” CorporationsS” Corporations Family Limited Family Limited

PartnershipsPartnerships Limited Liability Limited Liability

CompanyCompany

FEDERAL ESTATE TAXFEDERAL ESTATE TAX

This is a tax in flux – it will almost certainly remain, but not in it’s current form.

FEDERAL ESTATE TAXFEDERAL ESTATE TAX

All assets, minus liabilities – i.e. “net All assets, minus liabilities – i.e. “net worth.”worth.”

Included:Included:1.1. Real propertyReal property2.2. Personal property – cattle, equipment, Personal property – cattle, equipment,

cars, etc.cars, etc.3.3. Life insurance personally owned (death Life insurance personally owned (death

benefits)benefits)4.4. Anything else with any incidence of Anything else with any incidence of

ownershipownership

FEDERAL ESTATE TAXFEDERAL ESTATE TAX(Current Law)(Current Law)

In 2008 the first $2 million of assets/person In 2008 the first $2 million of assets/person is exempt; maximum tax rate is 45%.is exempt; maximum tax rate is 45%.

2009 - $3.5 million2009 - $3.5 million 2010 - $0 tax and no step up in basis2010 - $0 tax and no step up in basis 2011 and after - $1 million (top tax 2011 and after - $1 million (top tax

rate of 55%)rate of 55%)

Probable legislation in 2009 – ultimate Probable legislation in 2009 – ultimate exemption $3-$5 million.exemption $3-$5 million.

FEDERAL ESTATE TAXFEDERAL ESTATE TAX

Excluded from tax:Excluded from tax:

Unlimited marital deductionUnlimited marital deduction

$2 million exemption per individual – $2 million exemption per individual –

$4 million per couple $4 million per couple The exemption is wasted at first The exemption is wasted at first

death if the estate is not properly death if the estate is not properly structured.structured.

TAXABLE ESTATETAXABLE ESTATE

100% - No Tax (Marital 100% - No Tax (Marital Deduction)Deduction)

SURVIVING SURVIVING

SPOUSESPOUSE

HEIRSHEIRS

Remainder of Remainder of estateestate

taxed up to 45%taxed up to 45%

$2 Million $2 Million

– – No TaxNo Tax

LITTLE OR NO PLANNING – All to SpouseLITTLE OR NO PLANNING – All to Spouse

TAXABLE TAXABLE ESTATEESTATE

BypassBypass

TrustTrust

SurvivingSurviving

SpouseSpouseIncomeIncome

$2 Million – No Tax$2 Million – No TaxNo tax No tax

(Marital Deduction)(Marital Deduction)

No taxNo tax

$2 Million $2 Million

– – No TaxNo Tax Remainder of EstateRemainder of Estate

taxed up to 45%taxed up to 45%

HeirsHeirs

BASIC PLANNING – Bypass TrustBASIC PLANNING – Bypass Trust

FEDERAL ESTATE TAXFEDERAL ESTATE TAX

Gift tax:Gift tax:Gift tax exemption is limited to $1 Gift tax exemption is limited to $1 million.million.

Annual gift exclusionAnnual gift exclusion $12,000/donee$12,000/donee No limit on number of recipientsNo limit on number of recipients Husband and wife can join in “split Husband and wife can join in “split

gift” - $24,000/doneegift” - $24,000/donee

OREGON INHERITANCE TAXOREGON INHERITANCE TAX

Decoupled from the Federal Estate Tax.Decoupled from the Federal Estate Tax.

Amounts over $1 million subject to tax.Amounts over $1 million subject to tax. $7,500,000 exclusion for “natural $7,500,000 exclusion for “natural

resource property” – 2007 legislationresource property” – 2007 legislation Oregon tax return may be required Oregon tax return may be required

when Federal isn’t.when Federal isn’t.

OWNERSHIP STRUCTURES:OWNERSHIP STRUCTURES:

1.1.Sole ProprietorSole Proprietor

2.2.General PartnershipGeneral Partnership

3.3.““C” CorporationsC” Corporations

4.4.““S” CorporationsS” Corporations

5.5.Family Limited PartnershipsFamily Limited Partnerships

6.6.Limited Liability CompanyLimited Liability Company

SOLE PROPRIETORSOLE PROPRIETOR

Advantages:Advantages:1.1. Owner has Owner has

complete control.complete control.

2.2. Simple to Simple to establish and establish and operate.operate.

Disadvantages:Disadvantages:1.1. Unlimited Unlimited

personal liability.personal liability.

2.2. No continuity.No continuity.

3.3. Not easily Not easily transferable.transferable.

Single owner in a business venture.

GENERAL PARTNERSHIPGENERAL PARTNERSHIP

Advantages:Advantages:1.1. Relatively simple to Relatively simple to

establish and establish and operate.operate.

2.2. One level of One level of taxation.taxation.

3.3. Full control rests Full control rests with partners.with partners.

Disadvantages:Disadvantages:1.1. Each partner fully Each partner fully

liable for all liable for all business business activities.activities.

2.2. Not always easily Not always easily transferable.transferable.

Two or more people combine ownership and business operations.

““C” CORPORATIONSC” CORPORATIONS

Advantages:Advantages:1.1. Limited liabilityLimited liability2.2. ContinuityContinuity3.3. Easy to transfer Easy to transfer

ownershipownership4.4. Tax-free fringe Tax-free fringe

benefitsbenefits

Disadvantages:Disadvantages:1.1. Complex to Complex to

establish and establish and managemanage

2.2. 2 layers of 2 layers of taxationtaxation

A separate entity with shareholders who may or may not be employees and managers; pays

income tax as a separate entity.

““S” CORPORATIONSS” CORPORATIONS

Advantages:Advantages:1.1. Limited liabilityLimited liability

2.2. ContinuityContinuity

3.3. Easy to transfer Easy to transfer ownershipownership

4.4. No taxation at No taxation at corporate levelcorporate level

Disadvantages:Disadvantages:1.1. Complex to Complex to

establish and establish and managemanage

2.2. Only one class of Only one class of stock, with limits on stock, with limits on who can own stockwho can own stock

3.3. Income taxed to Income taxed to shareholders even if shareholders even if not distributednot distributed

Similar to “C” corporations in most respects, but no taxation at corporate level.

FAMILY LIMITED FAMILY LIMITED PARTNERSHIPPARTNERSHIP

Advantages:Advantages:1.1. Limited liability for Limited liability for

limited partnerslimited partners

2.2. Can transfer Can transfer ownership without ownership without transferring controltransferring control

3.3. Significant valuation Significant valuation discountsdiscounts

Disadvantages:Disadvantages:1.1. Relatively Relatively

complex to set up complex to set up and manageand manage

A form of partnership with a General Partner and one or more Limited Partners.

LIMITED LIABILITY COMPANYLIMITED LIABILITY COMPANY

Advantages:Advantages:

1.1. Limited liabilityLimited liability

2.2. High degree of FlexibilityHigh degree of Flexibility Can choose to be taxed like a partnership or Can choose to be taxed like a partnership or

like a corporation.like a corporation. Can choose centralized management (FLP) Can choose centralized management (FLP)

or equal management (partnership).or equal management (partnership).

A business structure governed by an Operating Agreement with a high degree of flexibility in

operations, allocation of earnings, distributions, etc.