Most business owners and spouses have not discussed what happens if the owner dies or becomes disabled. That lack of knowledge is among the greatest fears experienced by spouses of business owners. Life and day-to-day business dealings usually take priority and preparing a spouse for the owner’s demise usually is left for another day. Discussing the critical issues below should help spouses with planning they may have previously ignored.
Advisory Team – A competent advisory team is essential to an owner’s comprehensive financial plan. Periodically, families should meet together with all advisors to review how the comprehensive plan works and openly discuss how all are affected.
- Comprehensive Plan – Construct a comprehensive financial plan that covers retirement cash flow, insurance coverages, estate plan and tax considerations. Determine which member of the advisory team will act as the “quarterback” and have major input on the construction and execution of the plan.
- “Dry Run” – A family meeting with key advisors going through a “dry run” of the comprehensive plan is essential. Experience shows such meetings can dramatically reduce future conflict and eases the tension family members experience when in-laws are introduced into the picture.
Income – How income will continue for the surviving spouse and family is a critical concern. Upon death or disability, salary income usually stops and company stock may have to be sold, thereby cutting off dividend income.
- Cash Flow Plan – Has a retirement cash flow analysis been done to plan expenses and sources of cash flow in the future?
- Insurance – Will life or disability insurance have to be purchased to replace or generate income?
Buy-Sell Agreement – Businesses with multiple owners usually have a “buy-sell” agreement that covers the sale of stock. Often, the price formula is overlooked at the drafting stage or becomes stale over time and the deceased or disabled shareholder’s shares must be sold for an inappropriate amount, which affects the selling family.
- Dividends – If there is no buy-sell agreement, will the remaining shareholders continue to pay dividends to the surviving spouse?
- Current Terms – Are the buy-sell agreement terms up-to-date? Does the owner’s retirement cash flow plan reflect what will be received under the agreement?
Revocable Living Trust – Each spouse needs to have a revocable living trust (or will) to implement current and appropriate planning techniques.
- Successor Trustee – If an owner’s trust controls his or her stock, the successor trustee votes and controls the owner’s stock. Selection of successor trustees becomes critical for the owner’s survivors and relations with remaining shareholders.
- Family Members’ Inheritances – If less than all children will succeed to business ownership, have ALL children been part of family discussions to consider and analyze this occurrence?
Taxes – Mitigating federal and state taxes will help preserve assets for the surviving spouse and future generations.
- Current Estate Plan – Is each spouse’s revocable living trust up-to-date so that it focuses on income tax planning and state tax reduction given the high exemption for federal estate taxes?
- State Taxes – Twenty states levy state estate taxes. Examine state taxes that apply and their effect on asset preservation. Should the surviving spouse move to avoid state estate or income taxes?
A well-documented financial plan, engaged advisory team and informed family are keys to a business providing generational wealth to a family that enjoys healthy relationships. A spouse may be silent, but he or she really desires to know what will happen if there is something that affects day-to-day life as they currently know it!
Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning. Mike shares his deep estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members. Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.