to be an important cornerstone of the American business landscape. But to assure a smooth transfer of wealth and the viability of the enterprise after the founder retires or passes away means establishing keen estate planning and succession strategies. They’re critical.
PROTECT YOUR ASSETS
When it comes to discussing succession, many business owners would rather change the subject. Death, which is inevitable, is a topic they would rather avoid. “There’s the thought that if I make a will or make estate plans, I’m going to die. No one wants to deal with the issue of death. There is emotional pain associated with it so they tend to shy away [from it],” says Los Angeles-based attorney Samuel L. Hart, who specializes in estate planning for the wealthy.
He also points out that structuring a business as a sole proprietorship is the worst thing an entrepreneur can do. “The assets of the business are tied in personally with the founder. There is no independent entity that can be valued and sold and there is no distinction between the owner and the business.” Therefore, Hart strongly recommends that a business be incorporated, thereby forming a separate legal entity in which the founder could own 100% of the stock. “The assets are separate and distinct from the individual.” The goal is to protect the wealth of the owner through a variety of means to maximize the transfer of wealth to the heirs.
Hart explains the difference between the two:
|Founder’s Death||In the event the founder dies, any contracts the business has will be valid and continue.||Contracts are with the individual owner and end upon his death.|
|Worst-case Scenario||Business assets are in jeopardy.||Personal assets are in jeopardy.|
PRIMARY SUCCESSION PLAN FACTORS
Another topic that should be of concern is minimizing estate taxes, says David T. La Velle. One strategy: irrevocable life insurance trusts. “In this situation, the owner pays insurance premiums and if he or she dies, the heirs can file a claim and the policy pays the estate taxes. The assets would pass on to the heirs uninterrupted,” he advises.
- Risk Management: Key man life insurance policy covers overhead in the event the founder or primary person dies, estate tax insurance, and family limited partnerships to protect assets.
- Business Succession: Personnel in place who can take over leadership positions within the company in the event the founder dies or retires.
- Executive Incentive Compensation: Pay scale that allows for the retention of key personnel in the event management changes. It prevents mass exodus of executives to competitors.
- Comprehensive Estate Analysis: Purpose is to determine how much of the estate is tied to the business. For most entrepreneurs, the number is 100%.