1. Develop and Maintain A Succession Plan For Ownership and Management
- Should the successor owners and managers be the same person? Family members, existing co-owners, or third parties?
- How to protect co-owners? Adopt a shareholders’ or partners’ agreement?
- How to provide liquidity for the estate of the business owner? Adopt a cross-purchase plan among owners? Identify the liquidity needs of the business and the business owner.
2. Adopt A Complete Estate Plan and Review and Revise It Periodically
- A “complete” estate plan should include a Will, possibly a Revocable Trust for privacy and to minimize probate, Durable Financial Power of Attorney, Health Care Power of Attorney, Living Will, and appropriate beneficiary forms for life insurance and retirement plan accounts.
- The estate plan should be coordinated with any shareholder or partnership agreements.
- The estate plan should be reviewed frequently to determine whether changes should be made due to changes in estate tax laws. The federal estate tax exemption for an individual is presently (as of 2015) $5.43 million.
- A plan for payment of estate taxes should be adopted. Be sure the estate plan defers estate taxes until the death of the second spouse. What is the source of funds for payment of estate taxes? Liquid assets? Life insurance? Distributions from the business itself? Consider whether the estate will qualify for certain deferrals of estate taxes, such as due to holding an interest in a closely held business.
- Who are the appropriate fiduciaries (executor, substitute executor, trustee, health care agent, attorney-in-fact). Who should be the successors to such persons?
3. Planning for Retirement Plan Accounts of the Closely Held Business
- Consider the benefits and costs of adopting a qualified retirement plan for the business.
- Adopt beneficiary forms for the interest in the retirement plan. Be sure to name one or more contingent beneficiaries to avoid an acceleration of the payment of benefits. Should a trust be named as beneficiary to receive the interest of certain family members, such as minors or other persons who may not have experience in managing funds? Does the trust have the necessary legal provisions to receive distributions from the retirement plan?
- Hire qualified personnel to manage the assets in the plan and to administer the plan.
- Consider adopting a non-qualified deferred compensation plan for highly compensated employees.
4. Review Needs For Life Insurance
- Consider needs for life insurance
- To provide liquidity for the estate to pay debts, estate taxes
- To be invested for the support of the beneficiaries to supplement income from the closely held business
- Should the closely held business also own life insurance on the key employee/manager/owner to provide for liquidity to operate the business after the death of the owner and to provide funds to hire outside managers?
- Have a qualified insurance agent periodically review the insurance policy and whether it is performing in accordance with its original projections. Does the policy need additional premium payments to stay “healthy”? Also, determine whether the insurance company itself continues to be financially sound.
- Consider whether the life insurance should be held in an irrevocable life insurance trust to remove it from the taxable estate of the insured.
5. Premarital Agreements and Protection of Interests in Closely Held Business
•Consider whether a premarital agreement is important to protect the interest of one spouse in a previously established business prior to marriage of the owner.
6. Disability Insurance; Long Term Care Insurance
•Consider acquiring disability insurance in case the business owner incurs a disability and can no longer manage the business requiring a third party manager to be hired to run the business.
•Consider having each owner acquire long term care insurance.
7. Planning For Interests in S Corporations, Partnerships and Limited Liability Companies
- Consider whether special language meeting the requirements of income tax laws for S corporations, partnerships and limited liability companies have been incorporated into the Will or Revocable Trust of the business owner.
- Consider which type of entity provides the most appropriate tax effects for the business owner.
8. Is or Should Business Real Estate Be Held in a Separate Entity?
- Should business real estate be owned by the business directly or by the owners?
- If the real estate is owned outside the business, is there a written lease agreement in place between the owner and the business?
- Are there separate succession plans for the business and the real estate?
9. Succession Planning and Incapacity Information
- Does the business owner maintain a file listing important information on location of all estate planning documents, contact information of fiduciaries and advisors, a list of all recurring bills, sources of income, automatic deposits and withdrawals, account numbers and access information including passwords and other important information related to the business and its management?
- Does the file include a list of all important advisors and their up to date contact information?
10. Review The Above Steps Periodically
- As businesses change from time to time, important persons in the life of the business owner change, financial situations change, laws change, and the goals and objectives of the business owner evolve over time, the business owner should periodically review items one through nine above.
- Even if it appears that no such significant changes have occurred, a periodic review (at least every three to five years) may be prudent.
This manuscript was presented at Poyner Spruill LLP’s annual “Advising the Business Owner” seminar by Craig G. Dalton, Jr., H. Chalk Broughton, Jr., and William T. Belcher.