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Keep Your Family Intact with Proper Estate Planning

Keep Your Family Intact with Proper Estate Planning

It can be difficult to consider what will happen to your business and your family if you die unexpectedly.  Without proper planning, you could be leaving your family and/or key stakeholders in a huge mess. Proper planning allows you to keep your business on the right path even after an unexpected tragedy leaves you unable to continue running your business.

Estate plans focus on transferring assets upon an owner’s death. A successful estate plan achieves three important personal goals:

Financial Security: For the decedent’s heirs.

The Right Person: The decedent (rather than the state) chooses who receives his or her estate assets, including ownership of the business.

Estate Tax Minimization: Reduces the government’s bite, leaving more funds for the decedent’s heirs, when estate taxes are a factor.

Estate planning can also be a tender topic for business owners because they will occasionally need to decide which family member is the most appropriate candidate to continue running the business after their death. Families have been torn apart over poorly executed estate plans. Consider the hypothetical example below.

Jonah Kaczmin sat nervously in his office. Until the day before, he had been president of Kaczmin’s Electronics, one of the region’s largest electronic component distributors. Now he was on his way out of a job and felt he was a victim. Naturally, his first thought was to sue those responsible for his misfortune. The targets of his wrath were his younger sister and his mother. They had forced him out of the business, out of a job, and felt he was a victim.

After his father’s death, Jonah had received 49 percent of the stock in the family business. Another 49 percent share went to his sister. The remaining two percent—the swing vote—was held by their mother.

Jonah’s father had brought him into the business early and taught him well. After the founder’s death, Jonah assumed all responsibilities for sales and became the key man in the business. His sister, Stella, handled the bookkeeping and other administrative matters. Her husband managed the customer service department.

Despite the economic slump that hit the region, the business persevered under Jonah’s stewardship. It had a long-standing tradition of service and good name identity because the elder Kaczmin had pioneered new packaging and distribution methods.

Because of his dedication to the business, Jonah had not spent much time nurturing family relationships. He was less a devoted son to his mother than was his sister a devoted daughter. As their mother aged, she became increasingly susceptible to the influences of her daughter. Family friction continued. A confrontation was inevitable.

Jonah had always assumed that his superior abilities and position as president and board chairman would enable him to win any family showdown. He was wrong. At a special meeting of the board of directors, Jonah was removed from his posts, fired as an employee, and given three months of severance pay—after 25 years in the business.

Johah naturally felt victimized...but not so much by his sister and mother as by his deceased father. By failing in the most important remaining task in his life—to plan his estate and the future of the business—the elder Kaczmin made his son an unintended victim.

Jonah’s unfavorable business transition experiences may have been avoided had Jonah’s father asked and answered six critical questions.

How can I provide for an equitable distribution of my estate among my children?

Who should control and eventually own the family business?

How can I use my business to fuel the growth of my estate outside of my business interests?

How do I provide for my family’s income needs, especially those of my spouse and dependent children, after my death?

How can I help preserve my assets from the claims of creditors during my lifetime and at my death?

How can I minimize estate taxes?

An owner’s thoughtful answers to these questions, followed by appropriate implementation of a plan, may well prevent a similar experience in your family and support a smoother business transition for all parties involved.

Keep in mind that a well-crafted estate plan is only one key element of a successful plan for you, your family, and your business. Don’t let an unattended estate plan be the weak link in your overall plan.

We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

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What Have We Learned?

It is safe to say that this year was full of surprises. Some businesses thrived, while in other areas jobs were lost, companies were forced to go under, and we even lost loved ones along the way. Many businesses were affected by the pandemic in some way or another. According to a survey conducted by the PNAS (Proceedings of the National Academy of Sciences of the United States of America), 43% of businesses temporarily closed, and nearly all of these closures were due to COVID-191.[1]

We also learned that many small businesses are financially or structurally fragile. Companies were often strapped for cash, even when they had access to temporary government stimulus funds.

Although we may not have been able to foresee and properly plan for this year’s business and family disruptions, there are a few lessons to be learned about planning for the future so that your business can be more flexible and tolerant to change. We saw that responding to tough situations can be a good way to showcase your creativity and motivation to stay on track.

Flexibility is Key

Major changes in the economy, your industry, or your health can happen quickly. Companies that have the ability to turn aspects of their business model and operations on and off more quickly can minimize negative impacts (or maximize positive impacts) of unexpected changes. Remember that it may not be enough to be prepared to change direction in your own mind.  Communication with your employees can keep everyone moving together and smooth out rough spots if you have to change gears.

Having a strong and adaptable team and team leaders will also help with transitions. Industry changes happen often, and sometimes randomly, so having a team in place that is able to think on their feet and come up with creative improvements to the business can help your business thrive even in trying times.

Also, by leasing your equipment, vehicles, office space, and even employees, you can make your business more agile. Hiring contract labor or utilizing outsourced vendors can give you more freedom to make changes quickly. Think of it as adjusting dials in your business rather than locking yourself into fixed or inflexible investments.

Fire Drills Improve Outcomes

It can take valuable time to work through emergency or disaster scenarios, and it can be awkward to “practice” what you’ll do if faced with a major threat or disruption in your business. As awkward as it may seem, fire drills do work. When your team knows what the process is during an emergency or major change of events, they tend to act more calmly and make better decisions when an actual emergency does arise. Work through and document what you will do if:

You lose your largest customer or contract.

You lose your top executive or manager unexpectedly.

Your distribution channels are disrupted.

One or more components of your technology stack fails.

The more prepared you are for the unexpected, the better off your company and your employees will be. Don’t let them get thrown off by surprises. Have open communication about what they can expect if a major change happens.

A Belt and Suspenders Work Better

Planning for multiple solutions to a single problem is a good way to manage the impact of a disruption in your business (or in your life). Owners of closely-held businesses often have a lot of their wealth, and their family’s security, tied up in their business. However, the business is often illiquid, or its value may not be enough to support your family for an extended period of time. Owners who prepare for unwelcome changes might be able to use either a “belt” or some “suspenders” to hold up their family, such as:

Investing in income-producing assets outside of the business.

Reducing company debt (or at least removing yourself from personal guarantees for company debt).

Maximizing opportunities for funding retirement through qualified retirement plans.

Developing a “sinking fund” in the business.

Having some type of variation of solutions to any given problem can also ease the tension you or your family might have about the unknown future ahead of you. Preparation for the worst will only benefit the business down the road. You can truly never be too prepared.

We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.