If you didn’t think you had to plan- Get ready to in 2022!

Over the years I have observed the inability of many business owners to plan their business and personal estate effectively, for one reason or another. Any excuse doesn’t matter, the bottom line is many (great majority of business owners) don’t have adequate estate and business financial plans. I have often referred to them as “plan by default”, as opposed to a “designed plan”. Guy Baker is were I first heard the terms this way. Very adequate considering the subject.

As you can see in the illustration below, when you consider the exposure of $5 million estate after exemption credits are use, you have the additional loss of the stepped up cost basis. There is a tax ratio of 74% vs. 12% in 2022 if some of the proposals go forth.

Image the business owner who has a high value property which has deferred gain locked in, and the results of that property when at death it is passed to the children?

Here is one of the reasons why business owners should pay attention.

zoom in.

Pending Tax Changes May Be Around The Corner 2022!

 

I am currently reviewing some of the pending tax proposals being presented. Again, these are proposals and most of them will change before enacted.  

It occurred to me as I was reviewing the details of the tax proposals, how many changes I have seen over my long planning career.  It made me think of  how many times clients (YOU AND ME) had to  update our plans at our cost.  It is amazing the disregard the government has for the U.S. citizen in making this system easier to work with. I can understand why so many citizens put off planning, or just get tired of updating.  Unfortunately, this is the reality of the tax system and the changing of administrations.  

In 2017 we had a major income tax change which in most cases helped many  citizens lower their taxes.   It was easy to understand and it did what it was suppose to do, stimulated the economy along with increasing  public confidence.  

It also gave estate owners a path to plan to preservation their estates. The tax policy was working very well and our government tax coffers where growing.  

Pending Tax Changes- Again These are only proposals!  

The Green Book 2021  

Sr. Van Hollen (Sensible Taxation and Equity Promotion (STEP) and other plan such as the American Families Plan, and the “For the 99.5% Act (Bernie Sauders)”  

Income Tax Changes 

  • Top income tax rates 37%-39.6% effective January 2022; > $509,300 for married, and $452,700 for single 
  • Restrict tax deferral, “like-kind exchanges” (swaps of real estate that avoid current taxation that a sale would tigger  
  • Capital Gains might double-(sale of stock, investment real estate, etc. ) qualified dividend with incomes over $1million taxed at ordinary rates. This could be triggered for gains after April 28, 2021 

Social Security Taxes 

  • To coordinate the net investment income and self employment taxes, so unlike current law, a company could pay the owner a reasonable salary or guananteed payment, the overage became federal taxable profits, but not defined as payroll taxes.   This was assuming that the salary, and withdrawals were reasonable  compensation .  

The proposal is to tax pass-through business income (e.g. S Corps, limited liability companies, partnership) of high income taxpayers will be subject to either the net investment income tax or the social security taxes.   

Audits from the IRS: $80 BILLION increase over 10 years for IRS for audits.  

Estate and gift tax:  

  • Bernie Sanders proposal (For the 99.5% Act) calls for a return to lower estate and gift tax exemptions as well as significant changes to the rules on GRATs and grantor trusts 
  • Most dramatic:  Biden’s plan is to make the transfers of property by Giftand on assets owned at death (as of January 1, 2022) triggering events for capital gains taxes.  The gain is measured by the date of gift or death fair market value less basis.   
  • Exclusions: transfer at death to a US spouse.  

So there are other potential changes coming down the pike and we’ll have to wait and see.  Here is the bottom line:   

Split Interest Gifts: Grat’s ; watch for developments 

Grantor Trusts:  At Grantor’s death or trust is no longer revocable 

BOTTOM LINE- 

If you are a business owner with wealth in your business and you have not done any planning, it may be a good time to start thinking about a certified appraisal of your business and your holdings.  Also, you might want to start thinking about what your goals would be for passing your estate assets.  It’s to early to tell where the wind will blow and how you will be affected by any change, but it is not too soon to think of what you wish to accomplish in your estate and business planning. 

As I look some of the potential changes, Life Insurance Planning will become more significant in paying for the additional liabilities of passing your estate assets either by gift or death.  

To help you with your planning, I would like to offer to you my newly published Ebook called,”Unlocking Your Business DNA”. In the book I cover strategies I have used with business owners for over 50 years  with powerful strategies to create growth and profits in your business and also create an amazing amount of leisure time. 

To get the book, CLICK AND SUBMIT 
 
OR,  
 
If you with to receive a free business assessment of your business planning, take our ONE MINUTE SCORECARD SURVEY. Literally, it takes one minute to go through. Once submitted I will send you a FREE ASSESSMENT of our findings. We will be able to pin point the strong point and the points that you need to work on to create more business growth and profits.  

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More to come… stay tuned.  

Issues Of A Growing Company

This is a case study about   a company that did not have a buy and sell agreement in place.  The business has grown substantially.  The owners were concerned about the growth of the company, sacrificing larger salaries to invest and grow their business. 

The accountant recognized that there was a problem if there was a termination of a partner, and referred me to his clients to help educate  them on estate and business planning, and also to help them design a buy and sell agreement.   

Scenario:  

Bill and Sam started a very successful manufacturing company.  They produced the assemblies for hard drives. 

They are a C corporation and have scaled tahe business from four full time workers to about 34 employees. Their client base has grown from just a few to a few dozen over the years. 

One Page Issue(s) (With our team we identified these issues)

  1. The business has never been appraised so there is a question of the value of the company and estate.  
  2. Both partners have families and larger personal liabilities than when they started. 
  3. They have invested their earnings into the business and don’t have a retirement plan.
  4. They don’t have a binding buy and sell agreement, nor a method of funding the liability. 
  5. The owners are expecting the exemption credit to lower which will expose them to death taxes.
  6. Neither partner has done any estate planning, other than simple wills. 
  7. Retaining the key person in the firm who has the relationship with the customers, vendors and key contacts. Because he basically runs the company, the owners take a lot of time off.  They are concerned that the competition may try to recruit him.  If lost, it would have a major impact on the company.

Major issues and immediate concerns: 

  1. Potential fire sale of the firm if there is not a “planned design for buyout
  2. Uncertainty and instability for the employees, especially the key people in the firm.
  3. The possibility of the deceased partners family running the business with the surviving partner, leading to inexperienced leadership. 
  4. Lack of liquity to pay the taxes assessed on the value of the business and other administration costs. Without the valuation, it was a best guess estimate, jeopardizing accurate estate planning. 
  5. Business valuation disagreements, especially IRS litigation. 
  6. Lack of market for the business.
  7. The loss of income for the family.
  8. Lending from the banks could be cut off after the death of one of the owners. No  assurances that loans would be immediately available upon an owners termination. A concern that any new loans in the future may have convenants that credit lines would be redeemed upon a partners termination unless there was a valid buy and sell agreement. 
  9. Stress on the business’ cash flow or credit line  as a result of the surviving owner trying to purchase the deceased partner’s share. 
  10. The possibility of losing their key person to a competitor would be a significant loss to the firm.

One Page Solution

The most critical issues to solve now : 

  • Complete a Buy and Sell Agreement with funding/ both life insurance and disability insurance
  • A Certified appraisal to be done
  • Create strategies to keep the key person with the company
  • Start the process of personal estate planning for each partner

 There were other issues, but we all felt the buy and sell agreement was the most important at this point. 

One Page Solutions For Buy and Sell Agreement: 

  • Cross purchase buy and sell agreement funded with cross owned permanent life insurance
  • The insureds were about the same age
  • They were  both in great health
  • Premiums were about equal in cost, and the corporation would bonus the premium to the owners
  • Since the owners willl sell in the future, having the increased stepped up in basis would save taxes, as the partners plan on selling in the future.
  • Also wanted the insurance company to define full disability through the contract definition.

One Page Solution FOR KEY PERSON:  

A CEEP for the key person (Corporate Executive Equity Plan); For Key Person

  • Cash Equity for retirement
  • Tax free death benefit for family
  • Limited contribution by employee-basically paid in full by employer
  • Tax-free income at retirement- Will create about $200,000 tax free for 20 years at 66

There was a vesting schedule designed for the employee for 10 years. If he stayed he would have a much richer benefit than his 401k would provide

  • Non-compete, Non-recruiting  and solicitation of  employees of the firm,  and Non-disclosure agreement to be executed by key person

Estate Planning: 

Currently, working with the attorney on new wills, trusts, and an irrevocable trust for life insurance. There are some other things we are considering with real estate owned outside the state, such as LLC, AND inter vious trusts.

Triggers:  In the agreement we established the major triggers: death, disability, termination, retirement, divorce, bankruptcy.  We decided to use a disability income policy to fund that part of the plan.  We also wanted to have the definition of disability decided by the insurance company. 

As we move forward we are reviewing other issues yearly.  Also, forming the team with the attorney, CPA, and others was instrumental in accomplishing the results.  

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Treating Your Children Equally Or Fairly!

Leaving assets Equally or Fairly!

The One Page Issue

The Issue Overview:    

Parents want to leave different property to their two children. Son A is in the family business, while Son B is a teacher. They also want to update their estate plan.  

Break down and fact pattern:  Family owns a business worth approximately $3 million (ballpark guess by accountant, but not a certified appraisal).  The account has suggested that the owner get a certified appraisal.  There is a building worth $800,000 that houses the family business, and residential real estate worth about $1.5 million.  Their home is valued, $500,000, and an investment worth about $600,000.   Their net worth is approximately $6,400,000.[i]

Rents and salary are where the family derives their income.

The rental income profits are being invested back in the real estate to pay down the mortgages which will be paid off in five years.  

Intention of estate owners; Specifically, at the death of the surviving spouse, Son A is to receive the business and the business property.   Son B is to receive the real estate and residence. The investment account balance to be split equally.    

Past Planning:  The parents have done very little estate planning. They have an old, “I love you will” and do not have healthcare directives in place.  

One Page Issues:

Summary of Issues:  

A. Upon dad’s death- the status of mom and her income. 

B. The real estate other than the business building to Son B. 

C. Distribution of business assets to the son A

D. Estate settlement costs and taxes.

ONE PAGE SOLUTION!

One Page Solution (s), things we suggested to consider:

  • Certified evaluation of the business as a watermark of value, for a variety of things.
  • Update wills, possibly a living trust (Qtip/bypass) and Medical Directives
  • Placing real estate in Irrevocable defective grantor trust   with spouse as income beneficiary (Defective Grantor Trust) remove from estate and future value[ii].  
    • Parents are not concerned with making gifts. (See footnotes).
    • Parents are aware of a possible reduction in the exemption credit.
    • There is also the issue of the loss of stepped-up cost basis in the future because of future tax law changes. 
  • At spouse death, Son B can receive the investment property. Son B will receive the commercial building and the business.  
  • If more cash is needed in the estate, the business could fund a life insurance policy on Mom and dad (2nd to die) to absorb taxes and transfer costs.  Using the company to fund the policy via a split dollar or bonus plan. If so, the life insurance would be purchased by an irrevocable trust.  

Overview

These were a a few of the strategies the family could do to improve their situation, although there are many more ways to plan their estate.  Most important, this was the direction the family felt more comfortable after reviewing other possibilities.  Compared to the default estate plan they had; this planning puts them in a much better position to accomplish their goals. 

Bottom Line:  

  • The spouse will have the income needed to stay in her world. 
  • Son A received the company along with the building. 
  • Son B is treated fairly in that he receives the real estate and income from the real estate.
  • It also works well if the mother passed first.  The only exception would depend on the value of the stock which the father owned at his death.  Currently, he owns 100% of the stock.  (Once the business value is known other planning strategies could be implemented to save taxes and accomplish their financial goals as a family.  Things such as using minority stock discounts, recapitalization, estate tax funding with life insurance, gift programs, along with other techniques to accomplish the personal family goals).

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[i] Business needs certified appraisal- current value is an estimate

[ii] We are considering current tax laws; however, we are on the verge of a possible lowering of the exemption credit and repeal of the stepped-up basis

Case Small Business With Capital Needs

CASE #10. DATE: June 27, 2021

FACT PATTERN:

Bob started his business- a drill machine shop, with himself and one other worker-10 years ago. Currently, the business has 11 employees and is remarkably busy and receiving orders constantly and the future is bright. Half of the business comes from the state government as they have done work for the agency for many years. Bob has taken out loans for the growth of his business and has refinanced his home. He has an attorney and accountant. The company has a 401k plan and a good health plan. After we went through the Blueprint Issues[1]  , the owner admittedly has concerns that he has neglected his financial planning, putting most of his focus on his business. 

One Page Problem: 

  • At death, his estate is responsible for the debt; over $256,000– his estate is stuck with a business loan since he signed personally- this is now his spouse’s problem.
  • The business does not have a succession plan- this is a problem at death
  • No evaluation of the business:  For Estate and State taxation, and ultimate sale- This can mean a piece meal sell off. Competitors are not motivated to pay higher than discounted rates for assets affecting the ultimate value the asset will receive on liquidation
  • The owner has no will or distribution plan- 2nd marriage, 2 children and 2 stepchildren- Intestate law distribution. Spouse would be sharing assets with children- Client wants spouse to receive property.
  • Other issues- to work on in the future. These were the priority currently

One Page Solution: [2]

Based on the above issues we suggested the following to work on: 

  1. Updated estate plan:  Estate attorney to draft and execute wills, a bypass trust, healthcare directives, durable power along with other important documents.
  2. Apply for life insurance for the following purpose: 
    1. Family income and capital debt payment
    1. Business key person life insurance
    1. Based on the value of the business, the trust may end up being an irrevocable trust in which the trust will own the life insurance
  3. Start the process of getting a business valuation complete since one has never been done- for the purpose of future business succession planning 

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[1] Set up 16 major areas of concern for business owner which we address to see if there are issues to attend to. 

[2] This was the beginning of the planning. There were other issues to work on. These are the issues currently being planned.

Case Examples of When to Use Life Insurance

CONTINUATION:  PART II (CASE 3&4) 

Case Examples of When to Use Life Insurance and The Type to Use! 

Case 3 and Case 4  

Example 3 – The Buy and Sell Funding 

The company has three owners, should one of them die, the surviving partners would have to buy out the survivors of the deceased partner.   They have four choices for the funding of this potential liability.  The agreement states the stock must be purchased by the owners, or the entity:  

1. Sinking Fund 

2. Borrow the money 

3. Payout over a period  

4. Life insurance  

When looking over the costs, life insurance was by far the least expensive compared to the other options, and tere where assorted reasons why some of the options did not make a lot of sense:  

Borrowing the money; if they could get the loan, (doubtful that a bank would loan money to a company that just lost a key owner), it would cost principal and interest and may have an impact on the profit and loss statement.   

Sinking fund; Unless they put money at risk, they would have to settle for an exceptionally low rate of return (near 0). Plus, if death happened sooner rather than later, they would not have saved enough to pay the liability needed to purchase the interest.  Also, the sinking fund would cause them to commit a much larger contributions to the plan, thus eliminating cash to invest in their company.  

Life insurance: This was a cost of 1% of capital for a guaranteed payment. In this case, we could have used term, however, at some point the owners would have to change the plan over to a permanent coverage type of plan.  This would give them a guaranteed premium and longevity to the plan, to fund their buy and sell.   

The liability of purchasing the partners’ shares, is a long-term proposition, possibly lasting generations.   Permanent life insurance was the reasonable choice. The life insurance had “double duty dollars”, allowing them to use the cash value to purchase the partners out in the future when they retired.  

Example 4Keep the Star Key Man 

The owner of a successful business wanted to make sure they enticed the key person running the business to stay with the firm. The key person makes things happen in the firm. It allows the owner to take more time off, create more profits, and they benefit from the efforts of the key person.  

We put in a supplemental retirement plan, just for the key person, and the owner was willing to invest $30,000 into an executive compensation plan.   When the funding was discussed by the team of advisors, which were consisted of the CPA, attorney, the business partner, business consultant, and I, the following suggestions were made:  

– Put money in a mutual fund 

– Give the employee stock of the company 

– Purchase cash rich life insurance program 

– Have company stockbroker build a stock portfolio for the key person 

When it was all said and done, the life insurance program on a permanent basis was the clear winner:  

Reasons:  

– Benefits would be paid tax-free to the employee at retirement 

– The contributions would have little if any impact on the key person’s income tax opposed to the other methods 

– If the key person died before retirement, the insurance plan could complete a tax-free benefit he would have received had he retired, giving his family protection and security. The other options did not have that available.   

– The life insurance plan had guarantees, while the other suggestions did not 

  • The Employer had an arrangement to recover their full cost to the plan, where the other programs had a charge to earnings” against the company.  

Adding it up, the cash rich life insurance was a very clear winner.   

I have given you four uses of life insurance.  In each situation, the question to use term insurance, or permanent comes into plan.  There are a few simple questions to ask:  

A. Is the reason for the insurance permanent or short term. 

B. If it isn’t long term today, will it end up being long term. 

C. If it is determined that the need for the insurance is less than 15 years, without exception use term?  

If the answer is long term, or if it will be long term, I have used term if there was a cash flow issue, but with the idea of changing the plan when cash flow permitted.  

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Case Examples of When To Use Life Insurance and The Type To Use!

Part 1

Part One- Two cases using life insurance.   

Over the years I have seen clients and advisors get hung up on which type of life insurance they should purchase, permanent or term insurance, making their situation much more complicated than it must be.   

In this article I want to break down the different situations where life insurance is needed and what type of life insurance I would    recommend.  Again, this is my opinion, but it is based on several facts within the situation.   

Example 1 – Young Business Owner with A Growing Business 

Our client is running a business and is investing much of his discretionary dollars into the business. His wife is a nurse and makes  good income. This helps him support the family while building his business.  

He has two young children, a mortgage, and a business loan. They are not concerned about income replacement at his death, as his wife can work anytime and anyplace as a nurse. However, they are concerned about debt, business debt and the college costs for the kids. The capital required was $1,000,000 

His earnings have been increasing consistently for the past five years, and his business has been stabilizing while growing. The income from the business is more predictable and, in a few years, he feels it will be easier to budget.  

In this case I suggested he purchase a 20-year term convertible term insurance plan.  

  •  The premiums are affordable and low  
  •  the term of the insurance would be adequate 

I could have suggested permanent life insurance under a split dollar or bonus plan however, I felt it would impede his ability to save money in his business and continue to expand. 

Case 2-The Sole Proprietor with No Market 

The problem with owning a sole proprietorship, is in many cases there is no market to sell the business. These small companies create a job for the owner, a salary, and a place to go. It affords them a good standard of living, and enjoyment in their work. The problem, however, is at their death, a long-term illness, or a cash flow crunch, or loss of key employees, they do not have a market to sell too immediately.   

One of the greatest risks is dying while owning the company.  The business is too small for the open market, and normally there are a handful of employees who do not have an interest in or the money to purchase the business.  

This is a time that the estate in many cases needs the cash to settle estate expenses.   

Competitors are more than happy to lend a helping hand by offering 10-20 cents on the dollar for the assets.   

As a planner, I can help them!  

I can arrange to have a buyer ready at any time to provide the spouse or estate of the owner, the going concern value of the business.  

  The payout would be tax free. The cost could be from 1/2% to 2% of the value put on the business.   

If the cost were 1% for example, and the business was worth $250,000, the owner would pay $2,500 a year for this guarantee.  

If the owner decided to sell the business to a willing buyer, the owner would receive back part or all their cost for the arranged guaranteed purchase.   

The “Arrangement” at death is that the spouse/estate would receive tax-free the $250,000 purchase value!    The spouse/estate could also keep the business, and sell the assets or the business (piecemeal, or the whole business). 

If the owner of the business had retired and sold the business to an outsider or another family member, the arrangement would return to the owner all the deposits the business owner contributed to the “Arrangement” over the years, plus a reasonable interest rate to help them in retirement.  

Not a bad plan when you consider the “Arrangement” is guaranteed if the business owner paid their 1% to the arrangement.  

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Beneficiary Designations Can Become Very Critical Errors in Your Estate Planning!

 

June  2021  

Beneficiary Designations Can Become Very Critical Errors in Your Estate Planning!   

In all of the years that I have serviced my client’s planning their estates, one of the most important areas of the planning is making sure they are aware of the beneficiaries of their property.   

Many times, they have older life insurance and annuity contracts which haven’t been reviewed over the years, consequently, their family dynamics may have changed, and updating is necessary.  

The life insurance beneficiary and estate beneficiary are not exclusive to the planning.  Other property should always align with the overall planning, however, in this article, I want to focus on some of the pitfalls in naming beneficiaries, as this is, in my opinion, the most common mistake made in planning, not updating beneficiaries.i   

  1. Not thinking about the financial ability of the beneficiary to handle the inheritance they will receive. For example, they could be minors, incapacitated, or just uniformed in their thinking about finances, a bad marriage, and a host of other situations.  That being the case, a trust makes sense as they are flexible to design and can be amended over time. 
  1.  They are an adult, but you just don’t have the confidence that leaving a large sum of money to them is the right thing to do. Example:  leaving $500,000 to a 21-year-old son.  This will usually end up being a nightmare.  Again, a trust can be a great vehicle to control the outcome of paying the lump sum directly. 
  1. Leaving a large amount of money to your elderly sibling, or parents.  They are usually next in line to have to deal with the Medicaid system.  There are other ways of leaving the property to help them for future income and lifestyle needs, which will not jeopardize the asset to the Medicaid system.  
  1. Not naming contingent beneficiaries.  Should the primary beneficiary listed not be living at your death, the assets will pass to your estate versus to the next in line.  Naming contingent beneficiaries guarantees that should your primary beneficiary not be living at your death; the contingent beneficiaries will receive the assets.   
  1. Not naming “per stirpes” to your beneficiaries if you want your beneficiaries’ issues to receive the asset, should the beneficiary not be living.  Example, leaving asset to your child, if living, if not living, to their issues (your grandchildren).  

Tax ramifications are important also, Example, you want your two children to receive $125,000 each from your $250,000 IRA.  Child A has little income and is in the 12% income tax bracket.  They will pay $15,000 in taxes (Fed). Child B is a professional making over $450,000 a year.  They will pay much more in taxes, example 35% or $157,000.1 

Child A will pay $15,000 taxes on the IRA and net:  $110,000 and $150,000 (life insurance) = $260,000 

Child B will pay $37,500 taxes on the IRA and net $87,500 and $150,000 (life insurance) = $237,000 

In this case, more of the IRA could be left to child a with less tax than child b up to $329,000 before they hit the 24% tax bracket.  The equalizer would be to leave more of the life insurance tax free payment to child b, and less of the taxable IRA.  When you work it out, you would help save taxes on the IRA by 11%.   

There are many more Pitfalls which I can share with you, however, these seem to be the most common ones that I run into.   

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Reasons They Do Not Have A Transition Plan That Will Be Efficient – Part 2

Over the years, my experience with many owners I have found a major conflict with owners is the working in their business vs. working on their business. It is extremely hard for many business owners to make changes and spend the necessary time. I have a book called “Unlocking Your Business DNA”, which discusses the personal tragedy of not having the proper planning.  

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I have heard the stories from “I will live a long life”- “I need to work and won’t retire” “No one can do this like I can”   

Four possibilities of leaving your business:  

  1. Death (that includes dropping dead at your desk) 
  1. Disability 
  1. Retirement 
  1. Cannot do it any longer 

By not planning, the owner may find themselves receiving much less for the business, walking away without any value, or just die working at their “bench.” 

Because of this one reason, we developed the two hour a month planning process, called:  THE ONE PAGE PLANNING PROGRAM.   

The Owner AND Their Issues:  What is important for the owner is to have a personal retirement and estate plan to define their future needs. Do they want to stay active in the business even when retired? Will they have enough money for retirement? Will they have estate tax exposure. Do they have the proper estate documents? Do they have someone to sell the business too? How much will they have to sell their business for to net the amount of assets needed to provide their financial security? 

Owner Issues 

  • Financial Security 
  • Wealth Preservation and transferring the business with as little taxes as possible.  

The Family: What is the status of the family relationships in the business? Do any of the family members depend on the business for income?  Do they own stock? Are they in agreement with the proposed succession?  Are their careers involved with the business? 

Key Issues for family  

  • Compensation among family members in the business?  
  • Inheritance among family members?  
  • Management of family business, who is involved?  

The Company. 

  • What are the assets in the business? What is the value of the assets? What is the value of the business?  
  • Has the company been appraised in the last few years? 
  • Is the buy and sell agreement in force-signed and dated?  
  • Does there need to be more formality in the governance of the structure? 
  • Has there been a systematic attempt to enhance business value drivers over the years? 
  • What is the structure to get earnings out on a tax advantage structure?  
  • Who will be the leader of the company, and will there be a change in ownership? 

The Succession Plan 

  • Business Situation and questions when thinking about succession. 
  • How are you getting earnings out of the company on a tax advantaged structure?  
  • Have you considered the leadership and owner issues to be addressed?  
  • Each entity structure has advantages and disadvantages, and each should be looked at carefully when considering your future status as you transition? 

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The Challenges Of Developing A Transition Plan For Small Business Owners- Part 1 of 2!

Many small business owners do not have a plan for the transition of their business. A survey taken a few years ago suggested that only 30% of the small business owners had a transition plan. Out of the 30%, only 50% had a plan in writing. Of those plans, there is no way of telling if they were set up correctly, outdated, or even funded, considering the changing of the business status.  

 Options available for business owners for the transition of their business:  

A structured succession plan would enable the business owner to achieve their personal financial goals as its primary function, which would be to create a satisfactory income, and security for their future. 

A second goal would be to maximize the greatest potential value for the business, which would help the owner with their financial needs in the future, such as retirement.  

Another goal would be the long-term growth and the survival of the business to support family members for the future, key employees, or if the owner wishes to remain attached to the business, as a passive owner.  

One of the key issues is to make sure the business owner has control of the process and has defined the timing of any transition in the future.  

For example, if the owner wants to retire in five years, they must make sure they have implemented proper value drivers to maximize the company value.  Some value drivers take longer than others, such as building the next level management key group. This is the group that may wish to purchase the business at some point or run it for the owner.  

By not implementing this strategy early, the owner may be forced to delay the sale of the business until the strategy is developed, consequently jeopardizing their retirement plans.    

If the business is to be sold outright, there needs to be other quality value drivers working for the business owner to maximize the potential sales price.  

Overall, by not having a succession plan, and awareness of what value drivers need to be implemented, the owner risks not achieving the highest potential value for the business while weakening the ability to time and control their transition from the business.   

 Problems of not having a solid transition plan:  

  • Family equity issues 
  • Income and estate tax exposure 
  • Risk not creating the culture of retaining key persons and family members 
  • Uncertainty for people who have a stake in the company (investors, family members, long-term employee, as an example) 

For small privately help businesses, a succession plan is very personal, and cannot be a template program, as every company is unique, and the owners’ situations are very different. 

The key to a successful transition is having a solid plan which has an orderly process and is tax efficient.   

LEARN THE FOUR WHAT IF QUESTIONS EACH BUSINESS OWNER HAS AND HOW TO AVOID THEM BY REQUESTING THE WHITE PAPER:  CHAOS-THE BIG STORY; REPORT #4.