ESOPs for retiring entrepreneur clients?

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Company founders of the Nashville, Tennessee-based Quickway Carriers--H. Steven George and Roger Blume -- have plenty of time and income for fun during their retirement. Bill Prevost, Quickway Carriers’ president and CEO of the company, explained George “is on a trip around the world,” and Blume “is skiing.” Prevost adds: “I don’t call them when they are not here.”

Such a luxurious retirement became available to George, who founded the company in 1960, and Blume, who led an independent management group that purchased it in 1991, thanks to the Employee Stock Ownership Plan they started.

Both men still serve on Quickway’s Carriers’ corporate board. In December 2004, however, George and Blume formed an ESOP and by June 2005 the ESOP's trust had purchased all the outstanding shares of the company from the duo.

A retirement plan through which a company owner may sell equity for the benefit of his employees, ESOPs are financed through pre-tax dollars. For the business founders who want to retire but haven’t yet figured out how their equity in their company will lead to retirement income, an ESOP may provide an answer, says Cara Benningfield, a director of accounting firm BKD. Benningfield, who works from BKD’s Bowling Green, Ky., offices, specializes in leveraged ESOPs for closely held middle market companies.

“You have an owner of a medium-sized business. Most of their personal wealth is tied in a company, a very illiquid asset,” Benningfield says. An ESOP offers an exit with significant tax advantages and an opportunity to give employees who helped create the company the chance to own it.

The National Center for Employee Ownerships, a nonprofit group, estimates that in 2012 (the most recent year available) 12,000 ESOPs existed, 11 million people participated in the plans, and $870 billion in assets was held by those plans.

But the creation of an ESOP only makes cost-benefit analysis sense if a company’s employee roster remains reasonably stable because an ESOP must repurchase shares of departing employees, a costly obligation if workers are leaving all the time.

In contrast though, Judith McGee, chairwoman and chief executive of McGee Wealth Management, an affiliate of Raymond James Financial Services in Portland, Ore., expresses little enthusiasm about ESOPs for clients who are not among the executives structuring the retirement plan.

Typically, ESOPs, as retirement-income-vehicles offer “disadvantages” and “little flexibility,” to employees who do have equity in them initially, she says.

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.

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