Estate Planning: Hindsight and Foresight

Estate planning can be both a gut wrenching and time consuming experience. You don’t sit down and do it. It takes time and professional assistance. It often requires some tough decisions, difficult choices, even coming face to face with one’s own vulnerabilities. Perhaps, that is why so  many business owners, and particularly owners of family businesses, procrastinate. How well  you plan, however, may well determine not only your future but that of the family and the family  business, members of the Family Business Forum were told during a recent seminar at the Rothman Institute of Entrepreneurial Studies at Fairleigh Dickinson University.

According to several recent studies, an estimated one third of family owned companies will turn  over their businesses to the upcoming generation in the next five years. It’s anticipated that  within the next ten years more than half (53%) of family-owned firms will be in the hands of the  younger generation. Despite the overwhelming statistics and the fact that the lack of, and/or  inadequate estate planning — followed only by the failure to provide a smooth transition and  adequate funds to meet tax obligations — tops the list of reasons for most business failures, there  remains a resistance on the part of family business owners to take action.

A CD-ROM dramatization featuring a fictitious family business, Charles Curtis Enterprises, was used during the session to highlight the critical issues facing family owed companies. The session, which also included a panel of professionals from among the Forum’s sponsors, set off an extensive discussion and participation by the membership.

Among the segments depicted in the video, developed by MassMutual, were:

  • a father/owner with no set estate/succession plan who is reluctant to give up control   because he doesn’t feel either of his two children (a son and daughter) are capable of running the company
  • a brother and sister, actively working in the business, with little ownership training, who are totally frustrated by what they feel is a lack of direction and the father’s refusal to designate a successor
  • a non-active son with a private law practice who, like the wife and mother, is concerned that the inaction on the part of the father/husband may prove disastrous in the event of a crises.
  • an attorney/advisor and good friend, who may be the most objective and best qualified to lead the company while mentoring the children, but who has no desire to assume the burden at this late stage.

An owner, such as depicted in the video, whose ID is totally wrapped up in the business, may  find it difficult, emotionally, to accept his own mortality, Sal Salvo, a principal with Summit  Financial Resources, Inc., told the audience. It’s important, Salvo said, to work through the pain

A well thought out estate plan takes time, and once established should be reviewed periodically, at least every three years as   circumstances do change.

and anguish and take the necessary time to establish an estate plan, not something one can do in a  week. ” We worked on it for years,” commented one Forum member. A well thought out estate  plan takes time….and once established, should be reviewed periodically, at least every three  years as circumstances do change. Failure to do so, Salvo noted, could prove costly financially  and otherwise. If you don’t take the time and make the decisions, the government and/or the IRS  will do it for you, and the cost could destroy both the business and the family, he said.

Once established, “make sure you sign it (the estate plan),” Bernard J. (Bud) D’Avella, an  attorney and senior partner with Hannoch Weisman, cautioned the audience, “otherwise, it will be  worthless.” You also need to make sure that all those involved and affected are aware of your  plans and decisions, the audience was told. “Communication is extremely important,” noted  Salvo. “If you don’t communicate your intentions, you may find that you don’t have a plan at all,” added Don Scotto, tax partner with Coopers & Lybrand, LLP.

You’ve got to separate your investments from your emotions, Scotto said. Failure to do so, he  noted, can be disastrous with estate taxes claiming up to 55 percent of your assets. Insurance, he  told the group, is one form of protection. Charitable trusts, lifetime gifting are others. A professional advisor can help you determine the best way of preserving your assets and  minimizing your taxes, the audience was told. Proper planning can add up to “zero taxes” according to Salvo.

Gail Horvath, a vice president with CoreStates Bank, emphasized the importance of “liquidity”  particularly during a crises. Whatever the circumstances, financial obligations such as meeting  the mortgage, paying vendors, suppliers and employees, all must be met. She also cautioned  business owners to think twice before leaving everything to their surviving, citing emotional  stress, potential remarriage as just some examples of potential havoc.
Horvath reflected on the reasons for appointing an executor and why succeeding generations  should be included in important negotiations. Bankers, especially, she noted, are not willing to take risks and so “can be brutally honest,” if they believe the succeeding generation is incapable  of running the business. She also urged family business owners to talk to their banker when seeking referrals for qualified individuals, whether to fill an executive position or serve as  members of a board. Training and the involvement of the younger generation early on, she said, is extremely important.

Commitment, hard work and planning are all essential to ensuring the success and longevity of the family business. “For those family business leaders who truly want to see their business prosper beyond their own generation, the critical message is to plan and communicate those plans to the management team and intended successors,” Salvo told the audience. A properly executed estate plan will help preserve the family and the business.