Estate planning especially critical for business owners

By Brian D’Orazio Special to the Business Journal

Publication: Denver Business Journal
September 3, 2010

Estate planning is never easy, but it can be especially complex for business owners.

The owner of a closely held business must consider the best techniques and strategies for passing along personal and family assets, as well as the assets of the company. Add a business partner and surviving family members to the mix, and it’s easy to see how the owner’s intentions can go awry.

Business owners should go through an estate-planning process that addresses four key considerations that lay the foundation for a solid estate plan: succession planning, risk management, long-term-care insurance, and retirement and pension plans.

Succession planning – Typically, the largest asset of a business owner is the business itself. As a result, succession planning is one of the most critical aspects of the estate plan.

Business owners who have invested so much time and energy into the growth of a company will want to see the company outlive them and remain successful.

There are many ways to transfer ownership of a business. A common method among family-owned businesses is a buy-sell arrangement, which sets up a well-funded, orderly transfer of assets.

The arrangement specifies how a transfer of ownership interest will take place when a certain triggering event occurs – usually retirement, disability or death.

A number of factors go into determining the best type of buy-sell arrangement, including the type of business structure and number of owners.

One aspect of buy-sell planning often overlooked is funding. Without ade–quate funding, it may not be possible to implement a buy-sell arrangement. Life, disability and long-term-care insurance (discussed later) often are used as funding mechanisms.

Risk-management strategies – Many times, the success of a business is dependent on the owner because of their expertise, experience, relationships and entrepreneurial drive. What happens if that person becomes disabled or dies? What happens to the owner’s family? As mentioned earlier, disability and/or life insurance can help mitigate the risk of losing such a valuable and seemingly irreplaceable person.

Properly structured and funded insurance products ensure that funding will be available for an orderly ownership transfer. Steps also should be taken to minimize the risk from future liability claims arising after the owner is gone.

Long-term-care insurance – Long-term-care insurance continues to grow as a safeguard against the devastating financial risk posed by long-term medical care.

Business owners should consider purchasing a policy for themselves, and encourage business partners and key employees to do the same. Federal tax law makes all or part of premiums paid for qualified policies tax-deductible as a medical expense.

Long-term-care insurance also can be offered as an employee benefit, with specific tax benefits available to businesses organized as C corporations. When the corporation purchases a tax-qualified long-term-care insurance policy on behalf of any employee, the corporation can deduct 100 percent of the total premiums paid as a business expense.

Retirement and pension planning – As part of the estate-planning process, business owners periodically should evaluate their personal retirement plans. In many cases, a sizable percentage of the owner’s anticipated retirement income will depend on either the sale of the company at retirement or continuing income from an ownership stake.

However, some retirement income also will derive from the company’s employee retirement benefit plan, so some questions should be asked on a regular basis:

  • Is the current retirement plan meeting its primary goals and objectives for the company and for me?
  • Are we fulfilling our fiduciary responsibilities concerning employee education, the composition of our investment portfolio and expenses?
  • Are we keeping up with regulatory changes?

Uncertainty ahead – At this time, there’s a huge question mark hanging over all estate planning due to the uncertain status of the federal estate tax. In 2010, the federal estate tax has been repealed.

However, if Congress and the president don’t act to implement another plan, tax rates will return to their pre-2001 levels, which include rates as high as 55 percent and exemption levels as low as $1 million. More estates would be hit with higher taxes.

For some business owners, all of this complexity and decision-making is enough to scare them away from doing any estate planning.

As a consequence, fewer than 30 percent of family-owned businesses survive to the second generation.

Brian D’Orazio, a registered investment advisor representative with Clifton Gunderson Wealth Management, can be reached at 303 779-5710 or Brian.D’Orazio@cliftonfinancial.com.

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