:::::::NETWORK::::::: the ladue news business connection ::

by Doug Stanley

“Who would keep your business running if you were not able to?”

This seemingly simple question I ask when meeting with a new estate planning client can pack a punch. Often it is a question the business owner has ignored on purpose or has ignored because he or she has focused his or her energy on making the business grow. For those who own a business (especially baby boomers), it is an issue that deserves attention.

Deciding who would run the business is an emotional one. The business owner has poured his or her heart and soul into the business, and does not want to think about someone else taking over. The spouse or children of the business owner tend to be uncomfortable bringing up the subject because they do not want to appear greedy. The topic of a spouse or parent dying or being unable to manage his or her own affairs is difficult to address.

Despite the emotions involved, the business owner should be proactive about addressing the issue. If the business owner ignores the issue, problems will mount. For example, without a plan, a child working in the business might become disenchanted because she thinks she is not part of the future. On the other end of the spectrum, a child might mistakenly think that he will be in control of the business, when that is not the owner’s intention. Leaving no plan means leaving the business with no one in charge.

There is also the practical problem of liquidity needs. It is common for the business to be the most valuable asset in a business owner’s estate. At the owner’s death, cash will be needed to pay debts, taxes and other expenses. Without a plan, the owner’s estate might have to liquidate the business to pay these expenses. A well thought-out plan (which could include life insurance or a cash reserve) can address the liquidity problem.

The following two questions are commonly addressed in succession plans. Who will run the business if the owner has no apparent successor? What if the owner wants one child to get the business, but also wants to treat all of his or her children equally? The business owner’s estate may not be large enough to achieve that goal. Many business owners face these issues. A well thought-out plan will help the business owner analyze the available options and determine the one that best fits his or her situation.

Most plans will involve one of the following two courses of action: (1) one or more family members will continue running the business; or (2) the business will be sold to a favored non-family member or an outside buyer. If the plan calls for continuing the business, and the owner (most likely) wants to treat all of his or her children equally, a plan could call for accumulation of assets outside the business for those children not receiving the business. But, often a business owner needs all available assets in the business. If so, then use of life insurance could be an equalizer. The plan might include having the owner and the child who is getting the business enter into an agreement that obligates the owner’s estate to sell the business to that child. Proceeds from the sale could then go to the other children. There are many variations depending on the particular situation. The key: the business owner has to address the issues before disaster strikes.

A plan may call for the sale of the business to a non-family member. The advantage of this option is the owner’s family does not have the burden of keeping the business going. Also, the cash proceeds from the sale can benefit the owner’s family.

An estate planning attorney draws from several tools in helping an owner implement a plan, including buy-sell agreements, stock recapitalization, voting trusts, gifting options to minimize estate and gift taxes (e.g., family limited partnerships, gift to Crummey trusts) and redemption agreements.

Every business owner should have a formal business succession plan in place. An estate planning professional will help the owner decide on the best plan for his or her situation.

Douglas J. Stanley is an estate planning attorney with Greensfelder, Hemker & Gale, P.C. He has experience in individual estate administration, closely held business succession planning and tax financial planning. He also has experience in business sales, purchases and other corporate and partnership taxation issues.