Estate Planning Challenges
for Business Owners
Protecting Your Business and Family
Are you a business owner? Are you the first one to arrive in the morning, as well as the last one to leave in the evening? Have your employees ever taken home paychecks while you
sacrificed your paycheck to the bottomless pit called accounts payable? Have you ever paid your mortgage on a credit card? Over the years, you have worked through physical, mental
and financial pain that would have caused other folks to close shop and look for a job elsewhere. As a business owner you have survived untold challenges. If your business is a
family business, then you may face some unique challenges to protect and preserve your business…and your family.
Family Business Statistics
It would be an understatement to say that family businesses are the backbone of the American economy. Some 90 percent of all businesses in this country are either family-owned or
family-controlled. They come in all shapes, sizes and colors, representing all sectors of our economy. From agriculture, to services, to technology, to manufacturing, family businesses
generate an estimated one-half of the U.S. Gross National Product and pay half of all wages earned in this country. Not all family businesses are traditional small businesses either. In
fact, about one-third of all businesses included in the Fortune 500 are family businesses. But not all of the family business statistics are rosy.
Family businesses do not tend to outlive their founders. At any given moment, 40 percent of family businesses are in the process of transferring their ownership.
Unfortunately, two-thirds of all initial transfers fail. Of the one-third that survives an initial transfer, only one-half will survive a second transfer.
Why such a dismal success rate? The reasons are as varied and unique as the businesses and business owners themselves. Nevertheless, many of the failed
transfers can be traced to three causes: people, taxes and cash.
Business Succession and the Family
The family element in every family business can mean the difference between its success or failure during the transfer process. Common triggering events
include the retirement, disability or death of the business owner. Tough questions must be asked and answered. Otherwise, a business that took you decades to build can be destroyed
overnight. For example, who will run the business after you? Will it be your spouse, one of your children or a non-family member key employee? If not your spouse, 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-inactive children? Have you in-law
proofed your estate? Thinking ahead to the second-generation transfer of your business, what provisions have you made to encourage thrift and industry among your grandchildren?
Aside from the people planning issues, what effect will
estate taxes have on the survival of your business?
Estate Tax Uncertainty
The only certainty about the federal estate tax is its long-term uncertainty with each change in Congress and the White House. Additionally, many states have
imposed their own estate taxes, independent of any federal estate taxes. Accordingly, careful monitoring of the economic, political and legal climate is required. Why? Without proper
estate liquidity planning, your family may have to sell the family business just to meet an estate tax cash call.
Bottom Line
Unless you carefully coordinate your financial plan with your estate plan, there may not be enough cash to fund your ultimate objectives. An appropriately
funded estate plan can meet all of your people planning objectives and provide liquidity for estate taxes (and business debts). Life insurance, owned in the proper amount, type and manner,
may be effectively used to fund such money matters.
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