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Building wealth is only half the job. Protecting wealth for your loved ones and yourself is equally important. Through estate planning, business planning, and asset protection, our firm will help you protect everything you love — family, friends and favorite charities. For more information be sure to visit our web site where you will have access to our blog, events schedule and a complimentary newsletter subscription!

Businesses, Families, & Your Estate

Family businesses are interesting. You really cannot separate the two words. In fact, family “businesses” are rather important family “members” in their own right. As newborns, family businesses require considerable attention and resources. As they grow and mature, family businesses pass through their own life stages: terrible twos, childhood, adolescence, and full maturity. If you are the business owner, then you are acutely aware of each of these stages.

You were there for each life stage. Perhaps you even paid your mortgage on a credit card to keep the business fed. Was there ever a time when all the employees were paid except for you? In addition to your family business, you likely have a family. At some point, as sure as death and taxes, you will not be running your business. Question: Will your exit from the business be by design or by default?

What would happen to your family business, and your family, if something untoward happened to you today? In other words, what arrangements have you made to ensure that both would be okay without you tomorrow? If you are like 42* percent of baby boomers, then you do not have even a simple will.

Your Business, Your Family, Your Estate

At any given moment, 40 percent of family businesses are in the process of transferring ownership. Unfortunately, family businesses do not have a stellar track record of surviving the transfer. Fully two-thirds of them fail the initial transfer from founder to successor. Of the one-third that does make it past the initial transfer, only one-half will survive the next transition.

The key to the successful transition of your business is the careful coordination of your business estate plan with your family estate plan. If you fail to properly plan for one, then it can have catastrophic consequences for the other. Three common challenges to any successful business transition are people issues, taxes, and cash.

People Issues

Chances are, with all the time, energy, and financial resources devoted to building your family business, the business itself is the most valuable asset in your estate. It is the goose that lays the golden eggs for the family. So, unless you sell the business while you are alive, helping the “goose” survive you in good health is to everyone’s benefit.

Assuming you want to keep the business in the family, planning for the attending “family dynamics” is paramount. What role will your spouse play? Will your spouse continue your leadership role, or will your spouse need to live off the golden eggs produced by the business? If another family member will fill your shoes, are they ready?

Will more than one of your family members run the business? If yes, how will their roles be defined? Will you require outside financing to “buy out” your surviving spouse, or will your spouse be required to finance the purchase?

As you can quickly see, just when you’ve answered one question, another one pops up – much like the whack-a-mole game at a local arcade. Here is another consideration that must be addressed: If there are family members who are, or will become, active in running (and profiting from) the family business, how will you provide an inheritance for those who are not, or will not become, involved? This raises the question of whether an inheritance should be equal or fair.

Whether an inheritance is equal or fair is in the eye of the beholder. If you slay the goose and divide the goose, then you may be able to provide an equal inheritance to all family members – but the golden eggs will end. That certainly does not benefit the active family members or any loyal non-family member employees.

On the other hand, since the goose is the most valuable estate asset, the non-active family members may feel slighted should the active family members inherit the business. In fact, the non-active family members likely will resent you and the active family members. Do you really want to tear your family apart?

Taxes

Since you opened your business doors, you have had not-so-silent partners in Washington, D.C., the IRS, and assorted government agencies. When it comes to federal estate taxes, the winds of change can become more or less favorable to wealth creation and transfer depending on who runs Congress or occupies the White House at any given time.

If your estate exceeds the federal estate tax exemption limit, your family may need to sell the goose, just to satisfy an estate tax cash call. By the way, many states have or are instituting their own estate taxes, with much lower limits than at the federal level. Be sure to monitor any tax law changes and make appropriate adjustments in your estate tax planning.

Cash

Have you heard it said that cash is king? Well, in the context of estate planning for your family business and your family, no truer words have been spoken. What if there was enough cash to provide for your surviving spouse, independent of ongoing business cash flow, to clean up any lingering business debts and to “equalize” the inheritance between active and non-active family members?

Some would call that a miracle, but others would call it life insurance. It is the only financial tool that can cover an unknown tomorrow you cannot afford to ignore, in exchange for premium payments you can afford today. Regardless of what you decide to do, procrastination is not an option and hope is not a strategy.

*Insured Retirement Institute, “Boomer Expectations for Retirement 2018”