Importance of Estate Planning for Business Owners

It is not uncommon for the business to be the largest asset in a business owner's estate, while also being the primary source of income for their family.  As estate planning is essentially taking control of how property is to managed during life and distributed and transferred at death, a business owner cannot do exit planning without estate planning, or estate planning without exit planning.  Exit goals, such as transferring a business to children, always impact an owner's family and estate.

An example of where an owner's estate and exit plans intersect would be in the area of business continuity.  Sarah, a widow of five years, owned a large women's apparel retail store.  She started the business twenty-five years ago and remained as sole owner as the business continued to grow and realize success.  Sarah's daughter Sue graduated from college three years ago with a degree in design, and both she and Sarah had a vision for Sue eventually taking over the business. Sarah's son Jack, and other daughter April, have no involvement in the business.  

Tragically, Sarah passed away suddenly a year ago causing great distress to her children.  The fact that she passed without having finalized her estate plan resulted in even more hardship for her family.  It was one of those things that she knew she needed to do, but just never could "get around to it" due to the day-to-day trials of running a thriving business.  She had a will but it hadn't been reviewed in over fifteen years.  

The consequences of not having designed and coordinated an estate and exit plan, Sue did not end up owning the business as both she and her Mom desired, the business was sold at a deep discount due to uncertainty among employees and customers, other assets also had to be sold to pay high taxes and estate settlement costs, and there was resulting tension between the siblings due to a disorderly distribution of assets.  This is a short list of the potential consequences of deficient and disjointed estate and exit planning for a business owner.  

Like our fictional character Sarah, most business owners lead busy and full lives.  They can understand that estate and exit planning are important, but it can be difficult to plan the time to make it happen as it represents even more work.  So, it can be very easy to procrastinate.  

The focus of an impactful estate plan is not simply death but also the arrangement of assets (ownership and utilization) in ways that will help estate holders achieve financial goals in a tax efficient manner during life while providing for survivors’ needs and the disposition of property at death. A successfully implemented estate plan can:

  • Minimize estate taxes and estate settlement costs

  • Ensure that cash is available to pay estate taxes and costs

  • Provide for an orderly transfer of assets that meets the estate owner’s objectives and intentions

  • Preserve assets during life

  • Protect a business and ensure its successful transfer or sale

  • Provide peace of mind and family harmony

A well-thought out and executed estate plan, as part of a comprehensive exit plan, will be instrumental in ensuring that the right person takes over a business when the current owner dies. Other issues that would be addressed in a comprehensive estate plan would include the appropriate business valuation, equitable estate distribution among children, a properly drafted buy-sell agreement, tax and philanthropic planning.

As a business owner, it is wise to regularly review your estate plan to ensure that it represents your current desires and goals for your personal and business asset distribution. Please contact us if we can be of service to you in the review of your estate plan.

What Happens When a Sole Proprietor Dies?

In that, a sole proprietorship is entirely linked to the founder/owner, at the death of that sole proprietor the business cannot continue in its current form.  The business will either need to be shut down or the tangible and non-tangible assets sold to another individual or entity pursuant to the last will and testament.

A few of the potential challenges realized at death would include the business immediately losing value as the business is directly linked to the sole proprietor, valuation of the business assets, and enough liquidity so that the estate would not be required to sell assets at fire-sale prices in order to settle the estate.  Something that is often not fully considered by sole proprietors and their heirs is that, as in life, in death, there is not a separation of personal and business assets.  So,  the estate may be required to sell business assets in the same way they would personal assets in order to pay estate settlement costs.  Another challenge that often arises is the expressed desire of the deceased owner to sell the business assets at death to a family member, but the family member, who was hoping to eventually own the business, does not have the needed liquidity at the time to purchase the business.  And, of course, all of this, and more become even more challenging for survivors if the owner dies intestate, or without a last will and testament.  So, there are not a few challenges for a sole proprietor in planning the eventual distribution or transfer of their business interest at death.

If a sole proprietor has wishes or goals regarding the distribution of their business assets at death, and/or values-based goals such as family harmony, a well-thought-out written estate plan is imperative.  The owner may also need to give serious consideration to issues such as changing their business structure, providing additional liquidity at death, and the creation of a buy-sell agreement.  And, as it is true with all strategic planning, you cannot get started soon enough.

Consider contacting a qualified estate planning attorney for a review of your plan, and if we can be of service in helping you think through your goals and desires please contact us.

You Need To Know...But Do You Want To Know?

Have you ever heard the old saying, “What you don’t know won’t hurt you”?  Not sure why, or who it was in my life at the time who would say it, but I remember hearing it a lot when I was a kid.  Through the years I’ve found this saying, through personal experience and observation, severely misleading at best.  I wonder if the person who originated the phrase had “current hurt” in mind.  For example, I might not know my car has no engine oil and that the engine is going to die exactly a week from today – but today, because I don’t know it, it doesn’t hurt.  However, in a week when the car blows up and catches on fire, there is a lot that’s going to hurt.  So, what you don’t know, can absolutely hurt you, and often does…it simply may not be immediate.

Or, how about this…”You know you need to know…but you don’t know because you don’t want to know.”  And, maybe you don’t want to know because it’s easier not to know.  In other words, “I know I need to know…but I really don’t want to know because it could be costly and/or inconvenient.  So, I choose not to know.”   In our "engine oil" example, perhaps I noticed oil stains in the driveway, so I knew that I should check to see if there was oil in the car, but I chose not to because I didn’t really want to know – because I didn’t want to invest the time and $$ needed to put oil in the car.  For now, it’s easier not to know.  What ends up happening in situations like this?  Instead of investing a few minutes and a few dollars to add oil…I end up having to invest much time and money arranging for a new engine or buying a new car.  If we choose not to get the knowledge we realize we need, it can be extremely expensive and even devastating.

If you’re a successful business owner, your business is probably your biggest asset, and will play a key role in whatever represents success for you in the future (i.e., financial, values-based, or legacy goals).  You may understand there are things you need to know about how ready you are, and how ready your business is for you to leave on your own terms and conditions and successfully – but you’ve chosen to this point not to know because of the potential for added work and the additional requirements of time and/or financial investment…and because “what you don’t know, currently isn’t hurting you.”  It may not hurt now, but the hurt that comes later could much greater when you eventually leave your business when your financial, values-based, and legacy goals are not realized. 

Take steps now to expose reality and get the knowledge you need pertaining to your personal and business readiness for exit and then act on it.  And get help...because you don't know what you don't know.  

Die at Your Desk, or Go Golfing?

The truth of the matter is, every small business owner will eventually transition from the business.  While most have spent much time working in the business, and at times on the business, they have not given much thought to what to do after the business.

Whether you love your work so much that, in a manner of speaking, you’d be happy to die at your desk, or you’d like to devote much more time to your golf game, every small business owner needs to consider how they plan to exit.  And planning ahead has significant benefits.

The Business Enterprise Institute defines three major objectives that a business owner should consider prior to reaching that point where they must exit the business.

*          Timing of your exit – When do you want to leave?

*          Financial needs after exit – how will you support the post-exit lifestyle you desire?

*          Who's going to take care of your baby and run the business when you're not there?

1.     When you want to leave the business - Unless you want to die at the desk, you’ll want to consider at what point you desire to make the transition.  Pick a time frame and begin considering the implications of that time frame.   When do you back out of the day-to-day operations?  How long do you take to do this...years or months?  Can I effectively transfer the company to whom I wish to transfer it within that period of time?  How long will it take to train my successor or children to be owners?  Will I be able to realize my financial goals within that time frame?  Will market conditions lend toward a successful sale to a third-party?  The time frame you decide on is a key driver.  And, it's essential to establish at least a target date, or you could end up on the perpetual "I'm going to leave in around five years..." merry-go-round.

2.  What income do you need?  Depending upon the success of the organization, answers to this question vary widely. You may not require any income from the business and would happily pass on the business to family members or key employees without any benefit to yourself.  However, The large majority of owners require some type of income either from the business at sale, or a residual income stream from the ongoing operations of the business. There are a wide variety of approaches to defining how a payout can occur, as well as the timing of it. Engaging tax lawyers and accountants at this point is significant to walk alongside your financial planner to plan out the remaining years so that you can enjoy the standard of living that you desire as well as pass on value to your children, your state, or your favorite charity.  As much as we all enjoy supporting our local and federal governments, wise tax planning in this phase is very significant. Making the wrong choice can result in significant tax consequences, hindering your ability to use the value that you have built into the company.

3.  Who's going to watch over your company?  Hopefully, you have enjoyed working in your business and there is a sense of giving up "your baby" to someone else.  Choice of a successor is a most significant, and often an emotional decision.  There's the emotional aspect of giving up your hard-won successful business, as well as a desire to take care of those faithful employees who have served over the years in your company.  Several options exist, from passing the business on two children, selling it to key employees, selling it to a trusted third-party, or even an employee stock ownership program.  So significant factors come into play here - the most critical being who actually has the skills, knowledge, and temperament to own and run the company as well as you have.

Should a business owner have family in the business, the above questions become even more significant. Take the time to thoroughly discuss your goals and desires with spouse, children in the business, and children not in the business are all very significant.  It's often been said, that on our deathbed we do not desire to have another day in the office, but another day with our family.  Planning ahead enables conversations to be had so everyone's expectations are clearly understood prior to that day when transition actually occurs.