Comprehensive estate plan essential for business owners

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John P. Dedon

Protecting and preserving assets is complicated for individuals planning their estate.  Assets can be depleted by income taxes and potential lawsuits during lifetime and by probate costs and estate taxes upon death. 

A comprehensive estate plan should address all of these threats.  For business owners, creating and implementing an estate plan is even more important and perhaps more complicated.  However, the good news is that there are ample tools available to address the problems and provide solutions. 

Further, business owners can take comfort in knowing they are not the first to have successfully protected their family and assets.  In the coming months, this column will explore the options business owners have in seeking solutions to their estate planning needs.

Everyone is concerned about basic estate planning issues. These issues include avoiding probate, eliminating or reducing estate taxes, ensuring that the assets passing to children are protected from the children’s creditors and from their failed marriages, and making sure that the people or institutions named as Executors and Trustees manage the assets properly.  If there children under 18, guardians need to be appointed to care for the children.  Business owners have these same concerns, but face even greater challenges. 

Often times the greatest portion of a business owner’s net worth is tied up in his company.  There may be a primary residence, vacation home, retirement plan assets and other liquid assets and life insurance.  However, the company may be the most valuable asset as well as the one that is least marketable.  Notwithstanding, the company needs to be valued because it is included in the estate for estate tax purposes.  Federal estate taxes, at a maximum rate of 45 percent, are generally due nine months from the date of death.  Under current law, federal estate taxes apply once assets exceed $2 million. (Certain deductions are allowed, including a full deduction for assets left to a surviving spouse.)  In some states, estate taxes can apply if assets exceed $1 million.

Aside from estate taxes, there are numerous non-tax issues facing business owners.  Perhaps there is a desire to pass the company to the children and future generations.  Because the company is illiquid, sufficient cash and marketable securities must be available to pay the estate tax.  Life insurance may provide part of the solution.  Also, if the company is to pass to the children, how is it determined who manages the company?  Or, sometimes some of the children are working in the business and others are not.  Does the company pass to all of the children or only the children in the business? 

How does the owner ensure that all of the family assets are divided equally when the majority of the assets are tied up in the business?  What if the business is owned in part by unrelated partners?  As these questions illustrate, there are numerous concerns that must be addressed as part of a business owner’s estate plan.

Although the issues can appear overwhelming, much less a distraction from the owner’s primary objective — operating the company — the greatest danger is not planning.  We all know of companies that have been sold at fire sale prices to pay estate tax or failed with the next generation because of inadequate management.

Where do you start?  The foundation of all estate planning begins with a will, revocable trust, power of attorney and medical directive.  Once those core documents are in place, the second step in the planning is more difficult to predict.  Is charitable planning part of the solution?  If so, there could be a charitable trust or a private foundation.  Is current gifting to family members appropriate?  This could lead to a grantor retained annuity trust (GRAT) or a gift and sale to an intentionally defective trust.  As stated above, in the coming months we will navigate through the alternatives for the business owner to ensure that the assets pass to the beneficiaries of his choice most efficiently and with the least amount of cost and taxes possible.

John P. Dedon is a principal in the firm with the Trust, Estate & Tax Planning practice group of Odin, Feldman & Pittleman. Dedon blogs about estate planning issues for Virginians and U.S. citizens at www.dedononestateplanning.typepad.com.

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