Kelly Greene quotes John McManus in her Wall Street Journal Article, “Milking a Business for Retirement”:
Professional advisers are pushing two new maneuvers designed to help small-business owners save for retirement or pass down their companies to heirs. While the strategies can make sense for some people, they also carry risks.
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John McManus, an estate-planning attorney in New Providence, N.J., says that thanks to the higher exemption, he has worked with clients to set up this strategy “multiple times more frequently this year” than in the past. The maneuver can make sense for owners of stable businesses who would like to pass them along to their children eventually, but who can’t afford to quit receiving an income from that business, he says.
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Here’s where retirement income comes in: You then set up a payment plan for 15 years of about $70,000 a year, plus interest. That means each trust would be getting about $125,000 in income a year and making a payment of roughly $70,000 back to the parents, Mr. McManus says.
You would have to pay a lawyer to set up the trusts, of course, and the income they generate would be taxable—and you would be responsible for paying those bills. If the business has a bad year, you can restructure the debt or forgive that year’s payment, though you may incur additional income tax, Mr. McManus says.
Read the rest here.