If you are a business owner, in all likelihood your estate plan is your business exit plan. A significant part of the wealth you hope to pass onto your loved ones is currently locked up in your business. It is critical that you recognize this and act accordingly. Here are the top ten reasons why you need to review your estate plan.
- YOU DON’T HAVE ONE! If you are like most people (90% or more by most estimates), you don’t have even a simple will.
- IT DOESN’T PROVIDE FOR YOUR BUSINESS ADEQUATELY. If you have a will (or a trust), it probably treats your business like it was another Fidelity account, without anticipating the kinds of issues that arise in a business after the disability or death of an owner.
- IT FOCUSES SOLELY OR PRIMARILY ON DEATH. A will can only focus on death, and durable powers of attorney rarely address the full range of issues that arise after a disability. Trusts are sometimes better, but trusts also tend to focus on what happens to the business at death, and not on what happens to the business in the event of a disability, divorce, personal bankruptcy of one its owners, disputes, deadlock, or even retirement. Too rarely the plan includes a buy-sell agreement, and even then not all issues are addressed.
- YOU DON’T OWN YOUR ASSETS THE RIGHT WAY. If you have a trust, it probably isn’t “funded.” Funding a trust means retitling assets so that the plan will be effective. I often tell my clients that a trust without any assets in it is about as useful as a car without any gas in it. Lawyers often draft estate planning documents, but leave it to the clients to do the funding, which the clients invariably don’t do, or don’t do correctly. Failure to do careful planning and to maintain full funding may result in the transfer of ownership happening in the slow, expensive and public arena of the probate court.
- YOUR BUY-SELL ISN’T FUNDED, OR ISN’T FUNDED CORRECTLY. Not only trusts and wills, but buy-sell agreements need to be funded. Funding a buy-sell means making sure that cash will be available to make the payments called for in the agreement. Death provisions in a buy-sell are sometimes funded with insurance, but when I review buy-sells, it is not unusual to find that the insurance is owned the wrong way. It may be a redemption agreement, but the insurance is owned individually. It may be a cross-purchase, but the beneficiary is the decedent’s spouse. Bottom line: the plan does not work!
- YOUR SUCCESSORS ARE NOT TRAINED. Even if your plan is carefully designed and drafted, and fully funded, it won’t work unless the people who will step into your shoes when are disabled or dead know what to do, when to do it, and how to do it efficiently. As a business owner, your list of helpers includes not only trustees, personal representatives, agents under a power of attorney and health care proxies, but also the people who will manage your business and vote your shares.
- IT IS OLD. Even if the plan was well-drafted and properly funded, it will not work if it is outdated. A fundamental reality is that things change, and the plan has to be updated to deal with changes in the law, in the tax code, in the family, in the economy, in the business, and in the owner. Telling your lawyer (or yourself) that you will get around to updating later is a recipe for disaster. There needs to be a formal updating program from the beginning.
- IT IS NOT FLEXIBLE. Because things change, the plan has to have built-in ways to allow change after the death or disability of the owner. There are many tools out there that can provide the needed flexibility – things like powers of appointment, formula powers of appointment, an appropriate level of trustee discretion, memos of instruction, trust protectors – but many plans do not include these tools.
- IT IS NOT ALIGNED WITH PERSONAL GOALS. The decision on when to get out of a business is highly personal. The exit plan must be closely tied to personal goals. Leaving too early, or staying too long both create their own sort of problems. An owner needs a life plan in order to properly time the exit, and most business owners do not have one.
- IT IS NOT ALIGNED WITH MARKET REALITIES. Rob Slee has demonstrated that there has been a clear market cycle for the value of closely held businesses. The personal goal of maximizing value will be missed if an owner waits too long to sell the business. An annual review of the legal, financial, tax, business and personal aspects of the plan is the only way to ensure that you will get top value for your business. And getting top value for your business may be the only way to achieve your goals for yourself and your family