Great Artists never die… With proper planning, that may be true!
by Keith Jackson
Artists like many other business owners often have their business entity as a family owned enterprise. Here’s an unfortunate but increasingly common headline: Family business forced to close due to death of the owner.
Why do so many thriving family businesses seem to suffer this fate? The answer, in so many situations, is almost always the same: insufficient cash to pay estate taxes. Of course there are situations where non-financial issues such as family disagreements or simply lack of an heir account for a business going under. But in many cases, the real culprit is a lack of available cash.
When an individual dies, a monetary value is placed on everything he or she owns – houses, land, life insurance, investments, pensions, even personal property. When the individual is a business owner, the value of the business, plus any business assets and yes, that does include artwork intended for use by the business, are included in that total. The resulting figure is that individual’s estate.
Most successful business owners didn’t get where they are simply due to good luck. They got there though hard work, planning, and attention to detail. But if that’s the case, why does it seem that so many business owners, having built a thriving business, haven’t made plans for its succession or preservation after their death?
One reason is time. Owners of small family businesses and professional practices are busy people. They work long hours and take few vacations. Sound familiar?
Well, In fact, probably the most common reason given for not having a business succession or estate plan in place is I simply don’t have the time right now to deal with it.
Other reasons include a lack of knowledge – they simply don’t recognize that they even have an estate tax problem. Still other business owners believe they’ll have time “down the road” to take care of this important planning. But regardless of the reason, estate taxes frequently are a cause of business failure.
How bad could estate taxes be?
Think about your own situation for a moment. Depending upon the size of your assets - business, personal and otherwise – your heirs could owe the government anywhere from 37 - 50 percent of your estate’s value. If your gross estate is valued at more than $1,500,000*, the IRS – and possibly the state - will want a portion of every dollar of value over that amount. Think your business will have enough money – or be able to borrow enough money - to cover the bill when it comes due? Think again. Even a business with millions of dollars in assets can be cash-poor if the assets are tied up in property values and yet to be sold canvas your inventory. What will you have to sell-off, or borrow, in order to pay the taxes? How will that affect your bottom line? How will your creditors, clients and employees react? Seeing signs of trouble, what will their perception be? Will your clients go elsewhere? Will key employees jump ship? Will banks begin to freeze credit? What will happen to the value of your business then?
The fact is, without proper planning today, there may not be a “down the road” to put this kind of planning off until. Your heirs may find themselves in the position of having to sell your business outright to raise the cash needed to pay estate taxes. But then what? There’s no guarantee they’ll get what the business is worth (we’ll discuss the importance of business valuation planning in a future article) or even that they’ll find a buyer.
Life insurance to the rescue
That’s right, I said life insurance, now keep reading! This is where life insurance can help. When purchased as part of an estate plan, life insurance can help ensure that the money will be there when your business needs it the most. Life insurance can provide the cash needed to pay estate taxes, allowing your business to continue per any business succession plans you might have made. When purchased as part of a buy-sell agreement, life insurance provides cash your business associates (other family members, partners, or employees) can use to buy your share of the business from your estate, thus providing your heirs with the funds they need to pay any estate taxes you may owe.
Life insurance can also help in other ways. For example, it can help “equalize” your estate in situations where you want to leave your business to one of your children, and a corresponding amount of equity to other children. It can also provide an income to a dependant, as well as reduce any legal costs associated with the administration of your estate.
How do you get started?
The first step, if you haven’t taken it already, is to draft a will, indicating your wishes for the disposition of your assets, including your business. Second, develop a business succession plan, directing how your business assets are to be distributed. A professional planner can help you understand the different options available to you, including buy-sell agreements, stock redemption plans and other business plans.
Third, draw up an estate plan, making sure adequate funds will be available to ensure that your plans are carried out. Life insurance, annually costing just pennies on the dollar, is one of the most affordable ways to accomplish this.
Fourth, implement your plan. As crazy as it sounds, many individuals develop business and estate plan, only to put off implementing them until some future point in time: once the summer rush is over; as soon as the business reaches a certain size; after the first of the year. The result in too many cases is that the plan is never implemented and thus, is of little value when it is needed the most.
Finally, keep your plan current. When changes occur in your life or in your business, -and they will - consider the impact they could have on your goals and objectives.
For more information on business succession planning or to find out how financial planning may work for you and your business, contact Keith Jackson, Financial Consultant at Janney Montgomery Scott LLC in Philadelphia at 215-665-6477 or Kejackson@jmsonline.com.
* The applicable exclusion amount increases incrementally from $1,000,000 in 2002 to $3.5 million in the year 2009.
