Issue link: http://read.dmtmag.com/i/81015
MANAGEMENT 5. Trusts can be used to advance tax and non-tax objectives associ- ated with transferring wealth to the next generation. 6. Paying for good advice is an investment, not an expense. Making a trust outside your estate the beneficiary of a life insur- ance policy will help provide cash to pay some or all of the estate taxes that may be due at death. This type of estate planning is complex and should be discussed with your tax and financial planning advisors to ensure it is right for you and your situation. (For information about how estate and gift tax laws will change – and not for the better – in 2013, see the article "Selecting Your Com- pany's Next Leader" on page 70.) CHARITABLE GIFTS Another option is to give the winery to a charity or new owner now, but retain income from it and continue to live on the property in your retirement. Yes, certain trust structures exist that can satisfy these objectives. One method for creating an income stream for a number of years (i.e., in retirement) that works particu- larly well for transferring the under- lying asset in a low-interest-rate environment is a grantor-retained annuity trust (GRAT). Similarly, a qualified personal residence trust (QPRT) enables one to transfer a property today for gift and estate tax purposes and continue to live on it for a number of years. With both trusts, the donor retains something of value and the ulti- mate intended beneficiary receives the property at the end of the trust term. The amount retained by the donor can't be a gift (by definition). These trusts can be used to reduce associated gift taxes appreciably. Do charitable gifts offset other gifts made above your lifetime gift tax exemption? No. The lifetime exemption relates to taxable trans- fers. Gifts or bequests to charity do not reduce the amount of available tax-free transfers. 60 VINEYARD & WINERY MANAGEMENT SEPT - OCT 2012 VALUING YOUR BUSINESS There are a number of factors to consider when valuing your busi- ness to maximize tax-free gifts. The most effective and defend- able way to value businesses from an Internal Revenue Service and potential tax impact perspective is to have your winery appraised by a certified independent valua- tion expert. The expert will look at the winery's historical and prospec- tive cash flows, comparable winery transactions, and assets and liabili- ties. The valuation expert will also consider a variety of possible dis- counts to underlying value – that is, reductions in the value of the own- ership interest. Common discounts are for lack of control, marketability and/or liquidity. The size and applica- bility of these discounts will depend on factors such as the capital struc- ture of the business, size of the gift, and ownership/voting rights associ- ated with the intended gift. FINANCIAL FORECAST Ideally, all businesses should have some sort of budget or short- and long-term financial forecast in place. Wineries are particularly reliant on detailed multi-year cash- flow forecasts due to the indus- try's long operating cycles resulting from the long gap between harvest and consumption (often in excess of four years). They assist with assessing the winery's current financial position and periodic cash flows and understanding how it might change over time, depending on varying levels of wine produc- tion and revenue. In particular, the winery should examine its future cash needs and whether additional capital or debt financing might be required to meet certain financial obligations. Knowing what kind of income or deficit you can expect in the next year or several years can also help in making key wine- production and other operational decisions now, such as whether to replant or expand. It's also important to have your financial statements audited or reviewed. In any business, the WWW.VWM-ONLINE.COM quality of financial information can impact the value placed upon that business. High-quality financial information can reduce certain risk factors taken into account during the business' valuation. Further- more, by utilizing an independent accounting professional to audit or review, and thus improve, the financial statements, a winery business can increase confidence among the statements' readers. The key reader to impress is, of course, a prospective buyer of the business. If you plan to sell the winery business, the audit pro- cess will also help prepare for the due diligence demands of potential buyers. Independent audits also help minimize the possibility that a buyer may request price reductions to compensate for the risks associ- ated with relying on company-pre- pared financials. ADDITIONAL PREP The first step to a successful business transition is to start plan- ning now. Don't be afraid to talk early and often with your key exec- utives and your team of account- ing, legal and financial advisors. It is never too early to think about or plan for a potential transition, whether it is a sale, a cash-out of current investors, or an inter-gen- erational transfer. Timely prepara- tion will maximize your winery's value, differentiate it from similar companies for sale in a tight buyer's market, and ultimately achieve a smooth sale or overall exit strategy. Rob Morris, CPA, leads the Wine Business Services Group at Frank, Rimerman + Co. LLP, one of the largest locally owned accounting and consulting services firms in Northern California. Morris' clients include an extensive list of winer- ies, vineyards and trade organi- zations. He can be contacted at rmorris@frankrimerman.com. Comments? Please e-mail us at feedback@vwm-online.com.