Quick Estate Planning Tips for a Restaurant Owner

In forming any business succession or estate plan, a restaurant owner should consider whether to begin to transfer interests in the business during life or at death.
In forming any business succession or estate plan, a restaurant owner should consider whether to begin to transfer interests in the business during life or at death.
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The quick-service restaurant industry involves a rapid pace of business for the owner or franchisee. Accordingly, such individuals often neglect to plan for the future. It is important, however, to slow down and consider what would happen if the owner or franchisee became incapacitated or passed away unexpectedly. Implementing basic estate and business succession planning can provide numerous benefits and peace of mind to a quick-service restaurant owner or franchisee and his or her family.

Every quick-service restaurant owner or franchisee should have a basic estate plan. An advance directive for healthcare and a durable financial power of attorney will allow an agent to exercise healthcare and financial decision-making on behalf of an individual if they become incapacitated. The execution of a simple will would designate how the individual’s property is devised at death. A “pour over” will and revocable trust should be considered to better manage an individual’s various assets and minimize or avoid probate. Every individual should maintain and periodically update a catalogue of the individual’s assets, including business interests, brokerage accounts, life insurance policies, retirement accounts and real estate. The catalogue should be kept in a safe place where family members can locate it if needed.

A franchisee or quick-service restaurant owner should also consider business succession planning at the outset of any venture. A prospective franchisee should review franchise agreements carefully before signing. The franchise agreement may impose restrictions on future transfers, which could hinder estate planning, although these terms are normally negotiable. An outright owner of a quick-service restaurant should review his or her entity’s governing documents, such as the partnership or LLC operating agreement, or a corporation’s bylaws (assuming he or she has business partners). Such agreements may also have transfer restrictions, which could impact estate and business succession planning.

The quick-service restaurant owner or franchisee who has business partners should also consider introducing buy-sell agreements into their business. Buy-sell agreements clearly define the rights among partners with respect to the disposition of an interest in the business, and can create a more efficient and consistent exit for partners. Buy-sell agreements may be structured for entity redemption or cross-purchase of a departing owner’s interest (or a combination of both). “Key-man” life insurance should be considered as a method of providing liquidity for the purchase of a departing business owner’s interest in the event of death. The buy-sell agreement may also require all disputes be subject to arbitration or mediation, which may minimize or eliminate litigation and attorney’s fees in the event of a disagreement.

In forming any business succession or estate plan, a quick-service restaurant owner or franchisee should consider whether to begin to transfer interests in the business during life or at death. If business interests are gifted during life, the recipient will receive a “carryover” basis in the assets, thus preserving unrealized capital gains in the interest, which would later be triggered in the event of a sale. Any subsequent appreciation in the business interest’s value after the gift is necessarily excluded from the transferor’s gross estate is for federal estate tax purposes. Thus, gifting an interest “early” when value is minimal may be substantially less costly than several years down the road. However, if business interests are held until death, any unrealized gain in the business interests may be eligible for a “step up” in basis, thus eliminating capital gains.

A basic understanding of federal wealth transfer taxation is imperative in any estate or business succession plan. In 2017, each individual possesses a lifetime unified gift and estate tax exemption of $5,490,000 ($10,980,000 per married couple). Each individual also possesses a $5,490,000 exemption against generation-skipping transfers, which may be assessed, on direct or indirect transfers to grandchildren or more remote descendants. Individuals may gift up to $14,000 per donee ($28,000 per married couple if gift-splitting is elected) each year without depleting any gift tax exemption. If a lifetime gifting plan is implemented, valuation discounts on fractional interests may be obtained which further reduce the cost of the gift for transfer tax purposes.

A quick-service restaurant owner may consider establishing an irrevocable trust to which he or she may gift or sell business interests. The trust may be structured as a “grantor” trust, which is essentially treated as a disregarded entity by the IRS. Any sale of business interests to a properly structured “grantor” trust would prevent recognition of gain upon sale. Such a gifting or selling strategy may provide tremendous tax benefits while increasing protection of the assets from creditors.

There are numerous business succession and estate planning strategies, from basic to complex, which may be available to a quick-service restaurant owner or franchisee. While a quick-service restaurant owner or franchisee may be busy, it is important to slow down and consider these strategies. Implementing even a basic plan can reap substantial financial benefits for an individual and the individual’s family, can provide peace of mind, and can provide a smooth exit strategy from the quick-service restaurant when it is needed.

J. SCOT KIRKPATRICK. J. Scot Kirkpatrick is a shareholder at Chamberlain Hrdlicka (Atlanta) and leads the Atlanta office trust and estates practice group. Hispractice focuses principally on estate and income tax planning for high net worth individuals and their businesses. He may be reached at (404) 658-5421 or by email at [email protected].

ROBERT J. WADDELL Robert J. Waddell is a shareholder at Chamberlain Hrdlicka (Atlanta) in the estate planning and administration practice.He maintains a multi-faceted practice focused on the issues and concerns of business owners and franchisees, including contracts, mergers, lending, acquisition of real estate, corporate and business succession and wealth preservation. He may be reached at (404) 658-5429 or by email at [email protected].

STEPHEN C. HEYMANN Stephen C. Heymann is an attorney at Chamberlain Hrdlicka (Atlanta) in the estate planning and administration practice. He focuses primarily on the creation and implementation of complex estate plans for high net worth individuals which include the use of wills, revocable trusts, irrevocable trusts, charitable donations and lifetime gifting strategies. He may be reached at (404) 658-5481 or by email at [email protected].