United States: Estate Planning For Startups: From Silicon Alley To Death Valley

Last Updated: September 23 2014
Article by Jerry S. Goldman

Originally published in the Anderson Kill Estate Planning & Tax Advisor - Volume 13 Number 2, Summer 2014

Often, the founders of tech startups believe that there is no need to engage in estate planning, due to their age, the low present valuation of their business venture, or limited liquidity. However, tech entrepreneurs, be they early or late stage, like other business owners, have a host of significant estate planning needs and opportunities that need to be addressed. Estate planning attorneys possess an assortment of tools and techniques to assist individuals and their businesses in these circumstances. Some of these devices are, in fact, best utilized at early stages, providing an opportunity for significant long-term tax savings. More importantly, things happen in life — people get hit by buses while riding their bikes to work, business partners have disputes, children are born, marital relationships end — and good planning can help provide solutions for difficulties and mechanisms for long-term success.

Personal Considerations

A cornerstone of any estate plan is a will (or a will coupled with a pour-over trust). A well-planned will or trust provides the legal vehicle for determining who will obtain your assets in accordance with your wishes in the most tax-effective manner. It also establishes the mechanism to administer your assets and liabilities in the event of death, including the critical determinations as to who will be in charge and what their powers and responsibilities will be. The fiduciary that you select will have the paramount role in relation to any business interests owned at the time of death. If there are young children involved, arrangements must be made as to who is to take care of them and their property in the event of the tragic death of both parents.

Estate, gift, and income tax considerations frequently play a critical role. Presently, for federal tax purposes, the first $5,340,000 in net assets is shielded from estate tax (with a level of state death taxes varying from state to state). Any excess amounts are taxed at a 40% tax rate (plus any applicable state taxes). By utilizing credit shelter trusts and/or portable spousal credit amounts, significant long-term tax savings can be achieved, particularly with highly appreciating assets. While present valuations of startups may be low, substantial growth in the short or mid-term may be anticipated. Flexible devices such as disclaimer trusts or the use of spousal portability may prove to be extremely beneficial in those situations.

Particularly, planning is necessary with regard to your rights in intellectual property assets and how you wish to handle certain digital assets, addressing issues ranging from who will control your social media accounts to who will have access to data stored in the cloud in the event of your death or disability. Similarly, a secure repository of the necessary information for both business and personal transitions should be established and accessible.

A power of attorney, which can be used to make financial decisions on your behalf when you cannot, such as in the event of a significant disability, is often utilized in estate planning. Issues include when such power takes effect, to whom the power is granted, as well as the scope of the power. Likewise, consideration should be afforded as to who can make medical decisions in the event that you are unable to do so (and the definition of such circumstances), as well as an expression of your wishes and the advance designation of a guardian, if so desired and appropriate. Another important tool in the estate planner's arsenal is the effective use of lifetime gifts to reduce future estate and income taxes. This can be particularly useful in early stage startups, where gifts of presently lower-valued assets, often in certain types of trusts, can effectively and substantially reduce future death (and income) taxes.

Business Considerations

On the business side, consideration must be given to the relationship between the founders of a startup. What happens if one wants to leave or becomes disabled or dies — how is the remaining founder, and the business, protected? Conversely, how does the departing principal protect her or his investment? When can one become a passive investor, when can one compete, how are interests valued, how can a person be bought out, and how is the departing person replaced, are all critical issues that must be considered. The issue of what happens to stock options, rights, warrants and the like, in the event that a founder (or key employee) leaves, as a result of a change in circumstances or death, need to be addressed. Taking care of these issues in advance can avoid substantial problems in the future.

These issues mandate planning on the personal side as well. For example, if stock options must or should be promptly exercised upon death, planning must address the source of liquidity to fund such payments. Just as business relationships sometimes do not work out, estate planning for techies must address the potential of a marital split; prenuptial planning has an important role in these situations.

Liquidity and Charitable Planning

Insurance may play a critical role in this process. On the individual side, it may be used to reduce estate taxation via irrevocable life insurance trusts, and to address near-term liquidity needs, such as the source of funds to exercise stock options or short-term living expenses. Often the sale of the interest in the event of death may be inadvisable or impractical, and the insurance can provide the replacement income for living expenses, and the necessary funds for the payment of death taxes. From the point of view of the startup, key person insurance can provide the funding for transition and, where warranted, the funds necessary for a buy-out in the event of death.

Finally, estate planning for techies may involve planning for charitable gifting in a manner designed to achieve the optimum income and estate tax advantages.

Careful attention to this area can ensure that your choices are followed, adverse consequences are eliminated or minimized, and opportunities are secured.

Jerry S. Goldman is a shareholder in the New York and Philadelphia offices of Anderson Kill. Mr. Goldman practices in the areas of estate planning along with estate and trust administration, general business law, complex litigation, white collar criminal defense, employment law, and federal and international taxation. NY: (212) 278-1569 PA: (267) 216-2795 jgoldman@andersonkill.com

About Anderson Kill

Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estate, Trusts and Tax Services, Corporate and Securities, Antitrust, Banking and Lending, Bankruptcy and Restructuring, Real Estate and Construction, Foreign Investment Recovery, Public Law, Government Affairs, Employment and Labor Law, Captive Insurance, Intellectual Property, Corporate Tax, Hospitality, and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes - with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Ventura, CA, Philadelphia, PA, Stamford, CT, Washington, DC, Newark, NJ and Dallas, TX.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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