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ESOP: The Great Unknown Estate and Business Planning Tool

"For Better or Worse" is an article in Bloomberg's Wealth Manager (May 2002, Pg. 39) that discusses how to monetize the wealth of a business owner through an ESOP, Employee Stock Ownership Plan. ESOPs are one of the least understood and most underestimated and underutilized of all the power planning tools in a business owner's arsenal. Although most other tools or techniques have alternatives, in some cases, there is no way other than an ESOP to accomplish some of the incredible things an ESOP can do.

ESOPs can be used to create a market to purchase the closely-held stock of a business owner, to motivate and reward employees, or to take advantage of some very special tax incentives.

Keep reading and you'll find out more about what ESOPs are and why both shareholders and companies can benefit from establishing them.

ESOP DEFINED:

An ESOP is a form of stock bonus (or combination of stock bonus and money purchase pension) plan. Employers make contributions (not necessarily dependent on profits) in the form of cash or stock.

The employer stock acquired through purchase or direct contribution makes employees beneficial owners of the stock in the employer company. That's because the accounts set up for participants in an ESOP are invested primarily in the stock of the employer company. More technically stated, an ESOP is a qualified retirement plan designed to invest primarily in "qualifying employer securities."

The plan itself is "qualified." So in return for meeting many of the same general tax and ERISA qualification requirements (such as eligibility, vesting, funding, reporting and disclosure) as a profit sharing plan, an ESOP is eligible for some of the most generous tax benefits allowed by law.

FACTS ABOUT ESOPS:

· Only an ESOP is required by law to invest primarily in the securities of the sponsoring employer.

· An ESOP is the only qualified plan allowed to borrow money.

· 95% of ESOPs are in privately-held corporations.

· Studies of "before-and-after" ESOP performance generally indicate that sales, employment, and productivity growth improve after the installation of an ESOP, perhaps in part a function of the employees' enhanced sense of responsibility and recognition.

THINK OF AN ESOP WHEN . . .

You want to involve employees in the financial future of a business and give them both opportunity and interest in the long-term financial success of the enterprise. From the employer's perspective, this translates into performance incentive. From the employee's viewpoint, an ESOP is an opportunity to obtain "a piece of the action." It may seem trite, but it's true that an ESOP helps put both employers and employees "in the same boat."

You own an interest in a closely-held corporation and would like to create a market for your otherwise illiquid and unmarketable closely held stock.

Your employees want to acquire corporate stock but can not otherwise afford it. In another sense, an ESOP helps assure the continuation of a business into the future.

You want to generate or enhance cash flow for a corporation that needs revenue to finance expansion or for other business needs.

There is, of course, much, much more to this amazing tool which accumulates company stock and then allocates it to individual employee accounts. Whether your goal is turning a lifetime of work into "exit cash" or to ensure that the business you've dedicated your life to survives and flourishes, an ESOP is a tool you should know more about.

As always, feel free to call to discuss the pros and cons of this or other ways to enhance the financial security of your business and those you love.