As a business owner, the
buck stops with you (whether payroll, health insurance, employees, accounting,
taxes, or relationships with customers, vendors or suppliers). Question: What
happens to your business when you stop? [And you will stop one day… through
disability, death or retirement.]
Tragic
Transitions:
According to the Small Business Administration, about 40
percent of small businesses are in the process of transferring their ownership
at any given moment. Tragically, two-thirds of all initial transfers fail and
only half of the rest survive a second transfer. Why such a failure rate? While
the reasons vary, many of the failures can be traced to three areas: people
issues, property problems and legal plans.
People
Issues:
Without you in the business, who will keep it running
without running it into the ground? Will it be a family member, a key employee
or an outside purchaser? Will your spouse be financially dependent on the business or financially independent of the business? What arrangements have you
made for the inheritance of your business-active
versus business-inactive children? Will
their inheritance be equal or fair? Have you in-law proofed your estate?
Property
Problems:
Will there be sufficient property available to meet your
overall objectives? For example, most business owners want to ensure that their
preferred successor takes over their business, provide financial security for
their spouse (but not their spouse’s next spouse!), leave an eventual
inheritance among their children and protect that inheritance from future
problems (e.g., squandering, divorces, lawsuits and bankruptcies). Oftentimes,
life insurance is used to provide the cash
liquidity necessary to fund such objectives, when owned in the proper amount,
type and manner.
Do not forget the potential inheritance of your uninvited
business partner - the IRS! The only certainty regarding the estate (death) tax
is its uncertainty. Accordingly, careful monitoring of the economic, political
and legal climate is required at all times. Why? Without proper planning, your
family may have to sell your business just to meet the IRS cash call. [Note: Estate
exemption limits may return to $1 million with tax rates of 50% to 55% on
amounts over that limit. Stay tuned and be ever vigilant.]
Legal
Plans - Your Business:
Every business should have its own estate plan called a Buy-Sell Agreement (BSA). Simply put, a
BSA is a contract to transfer a
business interest upon one or more triggering events defined in the contract
itself. Common triggers include the retirement, disability or death of a
business owner. A BSA can be used regardless of entity structure, whether
the entity is a corporation, partnership or limited liability company. Also, a
BSA is applicable whether the business has one or multiple owners. As a
contract, a BSA is binding on third parties like the estate representatives and
heirs of a business owner. This last feature can be invaluable when a business
owner wants to ensure the smooth transition of complete control and ownership
to the party who will keep the business going. [Subject to certain Family
Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a
value for the business that is binding on the IRS for federal estate tax purposes
as provided under Internal Revenue Code § 2703, if necessary.]
No BSA is complete without a proper funding plan. Like a
beautiful automobile without fuel in the tank, a BSA without cash to fund the
purchase is going nowhere fast. Therefore, disability buyout and life insurance
are the only sure-fire ways to leverage the right amount of dollars at exactly
the time they need to show up.
Legal
Plans - Your Estate: Among estate planning professionals, there is an ongoing
debate: Should you have a Last Will and
Testament (Will) or a Revocable
Living Trust (RLT) when it comes to transferring your business interests at
death. The answer? It all depends. In all instances, a Will is your admission ticket to probate. On the other hand, a RLT will
not prevent probate unless it holds title to your business interest now or
directly upon your death. To muddy the waters even more, be sure the organizing
agreements of your business permit a RLT as an owner. Ignorance is not
bliss, especially when it comes to navigating your legal options. Professional guidance
is a must.
Conclusion: This has been a brief introduction to a very complex subject. Consult early and often with your accountant, financial advisor and attorney to coordinate your business succession plan with your estate plan with your financial plan. Remember: The buck stops with you.
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