GIE 2003: New Concepts In Exit Planning

Are you ready to exit your business when the day comes to retire? Probably not, according to a show of hands by contractors Friday, Nov. 7, during George Daniels’s presentation: “Business Succession Planning and Other Critical Issues for the Business Owner.” Daniels, CEO of Estate Integrity Group, a Greenfield, WI-based financial consulting firm, asked seminar attendees several times for a show of hands regarding their preparations to sell their businesses, turn them over to children or to protect their assets. Few in the audience could raise their hands in the affirmative to any of his probing questions

“I’ve never seen an estate plan that hasn’t had problems,” Daniels commented.
Often estate plans are not complete, he explained, or they follow stock formulas used by lawyers and tax attorneys. Using numerous case studies, Daniels showed that following expert advice blindly could result in overpaying on estate taxes and even put business survivability at risk.
The bulk of the presentation outlined steps owners can take to get the estate plan in place that they want and need. Solid estate planning should cover being prepared for an early death or incapacitation, and to exit their business on their terms when the day comes to retire.

Foundational preparation needs to include having three documents in place: a Durable Power of Attorney, a Health Care Power of Attorney/Living Will, and a Funded Living Trust.

The next step Daniel recommends is having adequate liability insurance. Contractors have trucks and crews out on the road every day and in the event of an accident it is possible to lose significant assets through a lawsuit. To protect assets, owners should consider putting their business assets into structures that protect against legal judgments. As an example, Daniels said as part of an injury settlement a judge can move shares of either an S or C Corporation to the injured party, but cannot do so in the case of an LLC or family partnership. Owners can divide their company assets into three parts – the operating company, the building and the trucks and equipment – then form each unit into a separate LLC corporation. Doing so requires expert help and takes time, he cautions, but it protects assets and offers tax advantages.

Regarding life insurance, Daniels said if the estate is small to support the family buy some term insurance to make sure the spouse and children will have what they need. Daniels advises placing all insurance policies in an Irrevocable Life Insurance Trust. This essentially gifts the policy to the beneficiaries and moves it out of your estate where it would be subject to be taxed at the full death benefit amount.

“An irrevocable life insurance trust avoids the alternative minimum tax, state tax and estate tax while making the policy benefits available to your family,” Daniels says.

For owners with significant assets, Daniels suggests buying hard assets inside an irrevocable trust – land or apartment buildings, for example – as an alternative to insurance.

Preparing to hand over your company to the next generation is a process that can require five to 10 years, Daniels says. It begins by teaching your children about life and about business – the value of money, how to invest, how to fire an employee and how to read a financial statement.

Communication between parents and children is essential.

“In America it’s taboo to talk about how much you make, what you have, what your parents have and the process of death or dying,” Daniels says. “But keeping financial asset information is a huge mistake. I know of one family in Chicago in which the father owned an antique automobile worth $1 million that he used to drive in parades. But a year after his death his family still hasn’t been able to locate that car.

“If you have elderly parents don’t ask them how much money they have hidden in the home or in bank accounts, but rather ask them to write down the assets and locations and put the list in a bank safety deposit box. Parents probably don’t want to tell you this information, but they also don’t like the idea of the family not being able to find it when they die.”

With children, Daniels advises asking them what sentimental items they want and then designating them to inherit them.

For business assets Daniels suggests holding a family meeting. The parents can sit in on the meeting as silent witnesses, but the discussion should center on what to do about the company and the assets just as if the parents were dead. To make sure all issues are addressed fully and fairly the meeting should be facilitated by an outside expert.

“Family meetings can be risky because you are talking about real people, real situations and real problems,” Daniels says. “In maybe 3 percent of these meetings people can end up so angry with each other that they quit speaking. But in the vast majority of these meetings the process is very beneficial for the parents and their children to improve the estate plan.”

Another action Daniels recommends is writing two letters on an annual basis. The first is an “I love you” personal letter to each child or grandchild. The second is a common sense business letter in which you write down who you think your key employees are, is there anyone in the company you feel is capable of running it, whether you think the company liquidation value should be low, medium or high, whether it should be sold and if so, who could run it for the six months to three years that it might take to find a buyer.

“Your executor does not have this inside information, so writing it down each year can help your survivors make wise decisions,” Daniels says.

To sum up his advice, Daniels says business owners have worked hard to gain the assets they own and they should also work to protect as much as possible for their heirs, their business and their employees. It’s important to know what you want to have happen and to take ownership of the planning for your eventual retirement or death. Attorneys and tax accountants are essential, but to take their stock advice can be a huge mistake.

For more information or to arrange a free consultation, George Daniels can be reached at gdaniels@quantilex.com.

The author is Editor/Associate Publisher, Lawn & Landscape magazine and he can be reached at rstanley@lawnandlandscape.com.