Simple Means for Avoiding BIG Problems

Vol. 11 Issue 6

Simple Means for Avoiding BIG Problems

Let me start with this disclaimer. This issue may seem like an anti-legal polemic. It is not.

I have many, many colleagues and friends who are attorneys. Because I specialize in business succession, exit, and transition, I work with business transaction attorneys, estate planning attorneys, planned giving advisors, tax accountants, financial planners, and wealth managers regularly. I insist that my clients get the best counsel possible and use professional counsel. I value their work.

As I am not a specialist at all in the area of estate planning, tax planning, or asset protection, I get overwhelmed easily by the number and variety of means available for achieving those ends and at how complicated they can be. Recently, I had two occasions where I was exposed to some of the more advanced methods of planning. One was an article from a professional journal on trusts and estates referred to me by a highly valued resource. The other was a talk presented by a leading advanced planner at one of the major national banks. The gist of both was how the use of some very interesting, effective, and complicated mechanisms could unwind difficult family succession issues or wealth transfer issues.

Why Are They Complicated?

The cases focused on situations where the original business owner(s) had attempted to leave equal shares of their wealth to heirs - the primary source of wealth being in the form of the owners’ businesses. They chose to transfer their wealth by distributing shares of the business. The heirs often included multiple generations with few of them having been involved with the businesses. This resulted in segmentation of owners with varying and conflicting interests. The cases being discussed recommended a variety of complicated techniques whereby the conflicting interests of the various parties could be mitigated.

As a non-legal, non-trust planning person with my own experience dealing with these types of conflicting interests, the thought that kept coming to me was “why had these situations gotten this difficult and/or complicated in the first place?” Extrapolating from my experience, I assume if we had been able to study these cases in depth we would find that the owners who had initiated them most likely avoided hard decisions or assumed that their heirs would be able to work things out. Both of these are very common and bothare mistakes!

KISS – Separate Wealth From Business

That is of course the acronym for Keep It Simple Stupid. And that is my first thought when I have clients who approach me with these types of issues.

Please take what I am going to say next in this context. The vast majority of my clients are first generation owners. The majority has limited family members who are interested in their businesses. Most of these are smaller businesses (under $20 million in annual revenue). So I am not talking about the large, multi-generation family businesses that are the focus of many other professionals in the succession field. Yet, even these clients of mine have issues of fairness concerning the passing of their business-centered wealth to their heirs.

Going back to the paragraph title, my advice to owners is to make it as simple as possible by separating their wealth from their business. If an owner has liquid capital to distribute that is apart from the business, the whole question of fairness and who gets what becomes much easier.

The Simple Way To Separate Your Wealth From Your Business

The first question that comes back from owners is, “How do you do that?” And the simple answers are insurance and cash flow planning. The former being the easiest while the latter requires more foresight and discipline.

The life insurance option – I do not sell insurance. But I do know how hard it is to create liquid, distributable value from a business – especially when heirs have different motives! Bluntly, (assuming no health issues) with a bit of forethought you can buy a lot of insurance. This creates wealth that is liquid. Wealth that when distributed by an owner can be used as heirs so choose – including buying the founder’s business if there are family members who are involved and have the desire.

The cash flow option – In past articles and in my book, Shortcut to Security, I have argued that the cash flow producing capacity of a smaller business is its primary wealth-producing attribute. Following the strategies I have outlined, owners can start building liquid tangible wealth outside of their business. This capital can be used, if an owner prefers, like the proceeds of life insurance.

Don’t Stick Your Head In The Sand!

You should do estate planning. You should do tax planning. The means in particular for the heir that wants the business can have lots of tax complexity. But first of all, stop avoiding the issue, pretending that it will take care of itself, and running away from hard decisions that reflect on your mortality! You’ve worked so hard to build your business and have most likely faced crises beyond counting. Have the courage to deal with the last chapter. And for goodness sake, buy some insurance, if you can, and make things easier on everyone by ensuring liquidity to resolve situations between heirs.

The Podolny Group specializes in helping business owners to develop and implement pragmatic/practical programs that converting business activity into wealth and piece of mind. Contact us for your free initial consultation.