Business Succession & Your Estate Plan

(The Money Pros) - Why is it especially important for an owner of a closely held business to have an updated estate plan?

• An updated estate plan should result in a much smoother transition period upon the death or incapacity of the business owner. 
• A business owner very often has a substantial portion of his or her net worth invested in the business.  A well drafted plan should address:
  • Company leadership
  • Source of funds to pay estate taxes
  • Ongoing payments to family
  • Retention of key employees
  • Arrangements with bank lender upon death

(Note:  The death of the business owner may trigger a default under a personal guarantee which, in turn, may allow the bank lender to call the loan.)

What complications arise upon a business owner’s incapacity?

• When an owner is incapacitated, there is often confusion as to who is leading the business and who now controls the stock.  Is it the spouse?  A child in the business?  What role, if any, do the children outside the business have?
• Who can sign checks and other documents for the business?  If the ill individual is the sole signatory, how does the family or company access certain bank accounts, for example?  If the ill individual is the sole signatory, how are funds withdrawn to make payroll?
• If the cash flow from the business is the sole support of the family, what is the backup plan?  Is there disability insurance?  Insurance to pay family bills other than medical bills?

What impact do estate taxes have that business owners often forget or ignore?

• Estate taxes are payable 9 months after date of death.  This applies to both Federal and State estate taxes.  This may seem like a long time but especially if a death is sudden, this can leave the family unprepared and can result in a fire sale of assets to pay taxes.
• If a business is a large enough portion of the taxable estate, the estate can utilize a payment plan with the IRS only for taxes attributable to the company value (Internal Revenue Code Section 6166).  The State of Rhode Island does not offer such a payment plan.
• Payment is due in cash – neither the IRS nor the State of Rhode Island will accept assets in lieu of cash.
• If cash in the estate is used to pay estate taxes, the family may not have enough cash remaining to operate assets and pay bills.