In today’s post we’ll continue our review of the six common mistakes that can destroy businesses. The second mistake is failing to do estate planning, and specifically the failure to accurately estimate (and pay for) any tax liabilities that result from a business owner transferring ownership via a will or trust.
Answer the following questions to see if your company is vulnerable:
• Does the owner have a will or trust and is it up to date?
• Does the owner have a living will AKA “pull the plug” instructions?
• Does the owner have a plan to retain key employees if something happens to him or her?
• Has the owner reviewed his or her estate planning documents in the past three years?
• Has the owner identified and written down his or her trusted advisors?
The more “no” answers, the greater the risk. How does your company look?
Estate planning is important for stating who receives your property and other assets when you die. But it’s also about minimizing potential taxes. As we discussed last month, spouses typically get their portion of an estate tax-free, but children, friends, or business partners do not. The so-called “death tax” comes in two forms: federal (estates valued at more than $5,250,000) and state (Oregon’s inheritance tax applies to estates valued at more than $1,000,000).
Although it may not be possible to avoid an estate tax, life insurance or other investment vehicles may provide a source of funding to avoid a potentially crippling blow.
Running a successful business is time-consuming, but failure to plan is planning to fail. Business owners should take steps to preserve the value of the company for the next generation.
Ben Franklin famously said that the only certain things in life are death and taxes. As we continue exploring the perils depicted in the Business Killers educational program, we’ll see what happens when a business owner doesn’t spend enough time planning for the second part of Franklin’s maxim before the first one occurs.
A widow meets with a lawyer and her two adult children shortly after her husband’s funeral. The news is grim. The children get half of the family business, but due to a lack of estate planning, they now owe $5 million in estate taxes based on the value of the company. Due to the loss of the company founder, the value of the business has dropped, so it may be much more difficult for the family to get a loan to pay the taxes. Although there is some life insurance, it isn’t enough to cover the tax liability. Regardless, the benefits are payable only to the widow, who now owns the other half of the company. Worse, there is no written succession plan for the business, and the two children are already jostling for control of the business.
In this case, taxes are a big part of the problem. Although a spouse gets their portion of an inheritance tax-free, children, friends, or business partners do not. The so-called “death tax” comes in two forms: federal and state. The federal estate tax applies to estates valued at more than $5,250,000. But many states are not so generous. Oregon’s estate tax applies to estates valued at more than $1,000,000. And while many people might think that sounds like a lot of money, consider that your estate includes not just the value of your business, but your home, retirement accounts, investments, and life insurance proceeds, as well as your other personal property.
In this case, the larger issue actually involves the lack of succession planning. By not designating someone to take control of the business, the deceased owner has created a leadership vacuum and a looming power struggle as family members and remaining employees argue about the fate of the embattled company.
Running a successful business is time-consuming, and as Lisa Brumm, a member of the Business Killers team of professionals often says, estate and business succession planning when you’re young and healthy has all the appeal of cleaning out the garage on the first sunny weekend of the year. But failure to plan is planning to fail, and it is incumbent on the founder of a company to take necessary steps not only to preserve the value of the company but to spell out intentions for ownership, control, and leadership for the next generation in a written succession plan.