Tag Archives: estate planning

The Great Recession And My Business

For many closely-held and family business owners, 2008 and 2009 was a stressful period. The volatile market followed by the Great Recession often produced

  • a contraction of business revenue;
  • the loss of profitability;
  • the reduction in value of their companies;
  • the aggressive and often not rapid enough implementation of business and personal cost-cutting measures;
  • the layoffs of far more employees than these companies imagined might be necessary;
  • the reduction of personal asset values;
  • the reduction of owner pay and employee pay levels;
  • the liquidating of owner personal assets to capitalize the business;
  • the development of tenuous relations with their banks;
  • a need to reinvent their business offerings in the marketplace; and,
  • the concern about being able to meet their future financial goals.

Plus, the stress of all the previous mentioned events produced the most burdensome time of our business and personal lives. I, in fact, can say there were several occasions in 2009 when I called to reach a business owner client mid-workday to find that I reached them at home while they were nursing a stiff drink. To compound all this, while most baby boomers do not own businesses, most of our clients who own businesses are baby boomers, and the age in relation to retirement, personal savings, and lifestyle spend factors that make retirement a challenge for most baby boomers are often compounded for our business owners.

I had many a conversation with an owner who confided in me that they built their company, and would build its value again, but they were tired. Because the recession induced exhaustion, they felt that they only had the energy to build it one more time. As a result, they wanted to be very proactive and intentional about planning to maximize the business' value and minimize taxes upon their transition out of the business. It is in this regard that the development of a Business Transition Plan is of paramount importance. The development of a Business Transition Plan involves multiple steps:

  1. Identifying the owner's financial and timing objective for the transition out of the business.
  2. Assessing the business and personal resources available to help contribute to the owner's objectives.
  3. Developing and implementing strategies that will contribute to maximizing and protecting the value of the business.
  4. Evaluating the opportunities for ownership transition of the business to third parties.
  5. Evaluating the opportunities for ownership transition of the business to inside parties.
  6. Developing business continuity measures to protect the business and the owner's family from the loss of a key owner or employee.
  7. Developing a post-transition plan for the owner that aligns with their Legacy objectives, including lifestyle objectives, estate planning, philanthropy and family relationship enjoyment.

Let's look at each of these in greater detail.

Identifying the owner's financial and timing objectives for the transition out of the business: For most business owners, the transition out of their business will be the single, most significant, financial event of their life. Identifying when and how much the owner desires is the first step in the planning process.

Assessing the business and personal resources available to help contribute to the owner's objectives: In order to evaluate if the owner will be able to meet his or her financial objectives, we believe we must start by developing a personal financial plan for the owner(s). This plan takes into account the reality that both business value upon transition and personal wealth accumulated during the operation of the business, combined, will together finance the lifestyle of the retiring owner. The more efficiently a person manages their non-business wealth prior to exiting the business, the less pressure it places on the value obtained from the business upon exiting.

Developing and implementing strategies that will contribute to maximizing and protecting the value of the business: In my many discussions with business owners, I often conclude that the owner believes their business is worth more than it really is. One of the most beneficial things a business owner can do to maximize and protect business value is operate in a constant state of planning and operations as if their business is “For Sale.” By evaluating all of your company's planning and operations in alignment with this premise, an owner can proactively manage the investment in their business. These planning and operational strategies often include:

  • Development of non-owner management.
  • Implementation of Buy-Sell Arrangements between owners helps protect owners, and their heirs, from the termination of employment, death, disability, or divorce of an owner. Though not every risk in a business can be insured for, death and disability can and often should have insurance policies implemented to finance the buy-sell.
  • Business Dashboard Metrics of sales and profitability.
  • Task functionality planning within the business.
  • Maintaining sufficient capitalization within the company for growth and banking purposes.
  • Maintaining appropriate amounts of key-person insurance on valuable company personnel to protect the company from the loss of an owner, or key-employee, and the financial burden that can result. Examples of this burden can include loss of revenue, reduction in profitability, cost of hiring a replacement, or default of or risk to credit facilities. In the midst of a crisis, I don't believe it's possible to have too much cash.
  • Formalizing appropriate compensation agreements with executive management, including golden-handcuff incentive compensation plans.
  • Maintaining a certain level of outside audits of the company's financials.
  • Recognizing when family should not be running the business and hiring professional outside management.
  • Consistently reviewing customer contracts to maintain the most favorable terms for your company.
  • Maximizing tax reduction planning opportunities on corporate profit, and at the time of a business ownership transition.

Evaluating the opportunities for ownership transition of the business to third parties: Many businesses are good candidates for a sale to a third party. These third parties often come in the form of a Strategic or Financial Buyer. The Strategic Buyer is often a competitor, or non-competitor that desires to enter your geographic market or industry, and sees your company as a lower cost or more rapid pathway to entry. The Financial Buyer typically comes in the form of a private equity group that owns another company that, when combined with some aspect of your company's offering or value, can acquire or joint venture with your company's offering to multiply the value of both companies within the private equity group's portfolio.

Either of these alternatives can produce an excellent financial transition windfall to a selling business owner, assuming the selling owner's company is clean. When an acquirer performs its due diligence, if it finds that the company hasn't been operationally managing itself in a professional manner as mentioned, hasn't applied consistent accounting principles, doesn't have a deep management bench, or depends upon the owners for ongoing revenue or profitability, the value it will pay in a transaction plummets.

Evaluating the opportunities for ownership transition of the business to inside parties: Whether your transition intentions are to transfer ownership to heirs, key employees, or the employees as a whole through an Employee Stock Ownership Plan (ESOP), assessing the skills and leadership capabilities of your successors is as important as the development of your ownership transition plan.

A successful transition plan requires the implementation of both Leadership Succession Planning and Ownership Transition Planning. One without the other greatly increases the potential for a failed transition. Once both have been designed, it is then important to evaluate what ongoing role the current owners will maintain through the transition, and the timetable of the transition.

Unlike a 3rd party sale, with an internal transition, the owner's gradual departure often helps facilitate the smoothest transition of Leadership Succession, while the owner can ease into retirement with the benefit of continuing to receive compensation during the transition, distributions of profits, implement gifting strategies, receive seller-financed note payments, or benefit from other strategies, thus lightening the burden on the owner's personal financial assets post departure.

Developing business continuity measures to protect the business and the owner's family from the loss of a key owner or employee: Despite the implementation of intentional planning, life can bring surprises. The premature death of an owner or key-employee, a disability or incapacity, the recruitment of a key employee by a competitor, can all derail the good planning, revenue stability, or corporate profitability.

Every good transition plan should address the need for Buy-Sell Agreements to protect owner personal finances, cash out the family of key-employee minority owners, permit the next generation to purchase the company from the previous owner at its current value before it grows further, reap the benefit of any Step-Up in Basis deceased owner's estates receive at the time of death, and benefit from the income and estate tax-free liquidity that properly designed and owned life insurance policies can provide the business and its family owners.

This planning can also present an excellent opportunity to utilize life insurance liquidity to fund the buyout of next generation family heirs who may not desire to stay in the family business, but otherwise the business might not have the funds to initiate these realignments of ownership.

Developing a post-transition plan for the owner that provides for their post exit Income and Wealth Management needs, and aligns with their Legacy objectives, including lifestyle objectives, estate planning, philanthropy and family relationship enjoyment: For many owners, their lifestyle, hobbies, net worth, and self-esteem is wrapped up in the business. The transition out of the business can be a stressful one.

Many of our clients find this transition to be an opportunity to develop a new personal life mission statement, having experienced great success in life, now focusing on what they desire their Legacy to be. This Legacy planning may involve an increased participation in philanthropy, spending more time with family, possibly even stepping into a new “missional” career. This change in life focus is only possible if post retirement Wealth Management provides for ongoing stable income, which we believe is more important in creating financial independence than a client's net worth.

However, the long-term potential threat of inflation, current low interest rates, increasing U.S. Federal debt, deficit spending and stimulus spending can present major obstacles for the retiree to generate sufficient income when developing a “traditional” post-retirement wealth portfolio. It is for this reason that we approach personal financial planning from a “non-traditional” perspective as we evaluate and recommend investment options beyond stocks, bonds, mutual funds and ETFs and also focus on the tax-efficiency of Wealth Management as it is not “how much you make,” as much as it is “how much you keep.”

There Are No Rules For Dealing With Those Who Suffer From Some Type Of Dementia

Let me begin by saying: There are no rules for dealing with this. That is, there is no firm set of steps to take, no one size fits all plan.

Sometime over the last few years, the baby boomers started to retire. This has created a complex double-edged sword for professionals. While these people are typically in need of legal and financial help, they are also more likely to suffer from some type of dementia. This problem is compounded by the fact that people typically wait until later in their life to perform complex transactions.

As an attorney who practices in the area of asset protection, captive insurance and estate planning, it’s a situation I run into with more and more regularity. In addition, I have a parent who has Alzheimer’s, so I’m familiar with this situation from the other side of the equation.

Below are some tips for dealing with this situation. In my next piece, I’ll discuss my situation in general to give you an idea of the solution that has worked for my family.

Let me begin by saying: There are no rules for dealing with this. That is, there is no firm set of steps to take, no one size fits all plan. For all of us, this is a matter of figuring it out as we go; every fact pattern is a different situation. So, if you’ve run into this situation and you’re looking for a plan, realize there isn’t one.

All professionals who deal with older clients are struggling with this just as much as you are. I realize this offers little comfort, but that’s more or less where we are.

That being said, consider these points:

Don’t be willfully blind.

The older people get, the more likely they are to suffer from some type of dementia. When you meet someone who is 60 years or older, be vigilant.

Assume there’s a problem.

And look for reason to prove there isn’t a problem. Look for the following signs:

  • repetition of conversation topics
  • inability to understand simple concepts
  • reaching for words they should know
  • overall general confusion

You don’t have to be a doctor to let common sense inform your observations on these points. If it seems like there is something wrong, there probably is.

Meet older clients multiple times.

People who suffer from Alzheimer’s and dementia can have good and bad days. On a good day, everything may seem fine over a short period of time, but problems will present themselves over a longer period of time. On bad days, they have pronounced problems.

Commit to see older prospects at least three times and for longer than a few minutes — meet with them for at least an hour.

In addition, meet with them at different times throughout the day. There is a condition called sundowning, meaning that as the day progresses, people get worse. Meeting someone later in the day can highlight a developing problem.

The older the client, the more conservative the recommendation.

There are a number of cases involving family limited partnerships that were sold to the deceased within years — if not weeks — of death. The various courts overturned the deductions claimed because the partnerships were obviously formed purely for tax reasons. In short, none of these plans should have been sold to the parties in the first place.

The same is true in all fields, be it legal, accounting or financial. Put more directly, don’t sell Grammy junk bonds.

Document everything.

For an older existing client, have an agenda for each meeting and send it to them beforehand, asking them to add their own topics of discussion. Document the meeting as soon as they leave. For prospects, develop a set of detailed questions that not only allow you to comply with “know your customer” rules, but also help to gain some insight into their respective mental condition.

It’s important to ask prospects for an explanation of their previous service providers.

For example, if a 65 year old who is financially well off comes into your office and says, “I want to create an estate plan,” begin by asking them if they already have a will written. The point is, a prosperous older person probably has existing relationships with various professionals. Why are they looking to change?

And again, keep the above points to look out for in mind: repetition, confusion, reaching for words etc…

Don’t be afraid to turn away business.

Here’s a real life example from my practice. An older gentleman (roughly late 60s) wanted to write a new estate plan. We met for lunch and toward the end of the meal, he just seemed a little “off.” I scheduled another meeting about one week later in the late afternoon (4 pm) and he was definitely worse off. More importantly, he already had an estate plan drawn by another attorney (who’s very good).

After the meeting, I sent him a letter thanking him for considering me, but stating I didn’t think he would benefit from my services. My suspicions (completely unproven by the facts) were that he and the other attorney had an argument or falling out and that I’d be walking into a powder keg if I took him on as a client.

Please share your own ideas, experiences and observations in the comments section below so that others may benefit from your experience.

Uses of Life Insurance in Estate Planning

Most people think life insurance is used for only one specific purpose: to replace the lost earnings should a primary breadwinner pass away. Those who subscribe to this theory often purchase low-cost, term insurance that expires soon after retirement. However, such thinking ignores the wide variety of uses for life insurance, especially when it comes to estate planning. Let’s examine several alternative uses of life insurance that many perhaps overlook.

1. Estate Creation – One of the most obvious, yet most overlooked, uses of life insurance is to create or expand one’s estate. Every parent wants to leave their children better off financially than they were. Life insurance can create an immediate estate for one’s children, often for pennies on the dollar. In uncertain economic times, life insurance can be an important resource to ensure our children’s economic well-being.

2. Liquidity to Pay Estate Taxes – The truth is, the IRS expects all estate taxes to be paid off within 9 months of your death. Federal estate taxes can be as high as 50% of your gross estate. The average Californian’s estate is dominated by two assets: their personal residence and their Individual Retirement Account. Neither of these assets is easily liquidated on short notice without triggering substantial tax penalties. Even if your heirs were able to liquidate one or more of these assets to pay taxes, using life insurance proceeds instead may make far greater sense.

3. Estate Equalization – In many families, the bulk of their estate is comprised of assets that aren’t easily divided among heirs, such as the family residence. Often, one heir has expressed an interest in preserving the asset, while others would prefer cash instead. Life insurance may allow you to divide your estate equally among your heirs, while reducing the need to divide assets or provide for joint ownership.

4. Family Business – Many parents who have invested their life’s work in their own business dreams that one day their children will follow in their footsteps, and take over the day-to-day management of the company. Often, this simply isn’t the case. A more typical scenario involves one child having an interest (or ability) to take over the family business, while one or more other siblings are interested in pursuing their own life goals. Forcing all your children, regardless of their interest (or business acumen) to participate in running the family business for the sake of receiving their inheritance is often a recipe for disaster. A far more sane (if less sentimental) approach is to hand over the reins of the family business to the child who shows the most
interest/ability. Using life insurance to “cash-out” the other heirs is an ideal way to preserve family harmony, as well as the continued viability of the family business.

5. Wealth Replacement – For many families, philanthropy is an integral part of their value-system. These values are often reflected in their estate plans through sizable bequests to charities upon their death. In such cases, amounts transferred to charity may reduce the inheritance of loved family members. An alternative is to use life insurance to replace the assets given to charity in a cost-effective manner. Such win-win thinking helps to preserve family harmony, while instilling the value of philanthropy in the next generation.

In Conclusion

In each of these scenarios, we can see valuable uses of life insurance that extend far beyond mere “paycheck replacement.” We have yet to meet the family that couldn’t relate to one or more of these examples. Which one applies to your situation? I welcome the opportunity to discuss your needs in more detail.

Important Note:

When using life insurance in estate planning, it is important to use an Irrevocable Life Insurance Trust (ILIT) to own the life insurance policy. This means that the proceeds of the life insurance policy will be paid directly to the beneficiaries of the ILIT free of estate or income tax.

Without an ILIT, a life insurance policy would be included in your gross estate, and your estate tax liability would be increased, not decreased.