• 
• 
• 
• 
• 
  • Publications
  • Events
• 

If you use an employee stock ownership plan (ESOP) as part of your succession and estate plan, you and your family business may be able to take advantage of three major tax benefits. These benefits also make the leveraged ESOP a useful financing tool; entrepreneur Sam Zell took advantage of it in his recent $8.2 billion bid for the Tribune Company.

What it is: An ESOP is an employee benefit plan somewhat similar to a profit sharing plan. The employee participants will ultimately benefit if the value of the corporation's shares appreciate. Upon retirement, an ESOP participant generally will be entitled to receive an amount of cash equal to the then current value of his or her share of the ESOP-owned stock.

How it works for you and your company: The three tax advantages are:

• The purchase price (which can be substantially financed through bank borrowing) for acquiring the shares of the corporation sponsoring the ESOP is deductible in full by the corporation through pension-type contributions and dividends paid to the ESOP.
  
  

• As long as the ESOP owns at least 30% of the corporation's outstanding shares, the selling shareholders can defer—or even entirely avoid—the gain realized on the sale of the shares by reinvesting the proceeds in the stock or debt securities of a U.S. corporation that operates a business.
  
  

• Once the shares are acquired, the corporation can elect to be treated as an S Corporation and thereby avoid all corporate income taxes. Shareholders are taxed on their respective portions of the corporation's earnings. However, an ESOP is exempt from income tax, so that if it owns all of the corporation's shares, income taxes will be avoided on the corporation's future earnings altogether.
  
  

Stay in control: In a traditional sale, the new shareholders take control. While the employees of the company as ESOP participants will indirectly own the shares that are sold, in many cases, the selling shareholders may be able to maintain day-to-day control of the company. For a family-owned or other privately held company that is planning for a sale or other liquidity event, the ESOP provides another potential market.

For more information on these and related issues, please contact the Trusts & Estates Group at Herrick, Feinstein LLP or Fred Green (fgreen@herrick.com).

Copyright © 2007 Herrick, Feinstein LLP. Trusts & Estates Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.