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.

Learn more about preserving your family business from one generation to the next...

Buy-Sell Financing

     True or false: Most family business owners want their businesses to be liquidated when they retire, become disabled or die. If you answered false, then you are correct. In this article, we will survey the fundamental key to the survival of a family business – a Buy-Sell Agreement (BSA).

Introduction

     A BSA is a lifetime contract providing for the transfer of a business interest upon the occurrence of one or more triggering events as defined in the contract itself. For example, common triggering events include the retirement, disability or death of the business owner. An interest in any form of business entity can be transferred under a BSA, to include a corporation, a partnership or a limited liability company. Also, a BSA is effective whether the business has one owner or multiple owners. As a contract, a BSA is binding on third parties such as the estate representatives and heirs of the business owner. This feature can be invaluable when the business owner wants to ensure a smooth transition of complete control and ownership to the party that 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.

Read on to learn more about the fundamental key to the survival of a family business...

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Life Insurance Settlements

     Are you age 65 or older, with a life insurance policy that you no longer really need or are you paying premiums you can no longer afford? Perhaps the policy was acquired to fund a Buy-Sell Agreement for the family business you sold, or for some other reason no longer relevant to your current financial and estate planning objectives. Regardless, rather than let the policy lapse, you may consider selling it for cash. The cash could be used for any purpose you wish, to include for current health care costs, or even to finance that dream vacation you have been deferring.
     Before selling your life insurance policy, however, be sure to get independent counsel regarding appropriateness issues and tax consequences. In addition, the sale of life insurance to third parties may be governed by your state laws and you will want to make sure everything about the proposed transaction is fully compliant. Contact your state insurance commissioner  and the Life Insurance Settlement Association.