According to the American College of Financial Services, “The ultimate goal of estate planning is to fulfill the estate owner’s wishes as closely as possible.”
If we accept this common definition of estate planning, owners need to answer three questions for their estate planners:
- If you were to die suddenly, would your business continue without you?
- If you were to die suddenly, could your designated successor run the business with minimal disruption?
- If you were to die suddenly, your business sold for its full value, and your family received the cash today, would your spouse’s income continue for the rest of his or her lifetime?
Most business owners have not been asked these questions, nor have they given much thought to possible answers. Exit Planning provides a path for advisors to ask these questions in the context of a lifetime exit. In answering these lifetime-centered questions, owners must articulate their lifetime goals regarding business ownership and their families’ financial well-being. Advisors then use those goals to create their estate plans.
Estate Planning for Business Owners
Let’s look at an example of how goal-based estate planning for business owners plays out in a straightforward situation.
A business owner has determined that she wants three things when she exits her business (presumably alive):
- $250,000 of income per year for the rest of her and her spouse’s life.
- To transfer the business to two key employees.
- To be certain that other employees’ positions are secure at the company after she transfers the business.
In setting her lifetime or Exit Planning goals, this owner, like most, has also set her estate-planning goals. The advisor’s job is to make sure she achieves them—whether she leaves her business dead or alive.
To do so, advisors must craft (or modify existing) business continuity arrangements and create (or modify existing) estate-planning arrangements to reflect the business owner’s clearly articulated lifetime and at-death wishes.
Of course, the pressing question is, “Can the business owner’s wishes be attained should she die or leave her business tomorrow?” The ability to answer this question (and taking advantage of the opportunity it offers) separates adequate planners from the greats.
Consider that most business owners want to exit their businesses within the next 10 years. It’s safe to assume that these owners have given far more thought to what they want and need—for themselves, their families, and their business—when they exit than they have to what will happen to their families and businesses upon their deaths.
Link Lifetime Goals and Estate-Planning Objectives
Business owners and their advisors must capitalize on owners’ willingness to plan for a lifetime exit and go farther by also discussing an at-death exit. Advisors must link lifetime goals and estate-planning objectives by asking owners three questions:
- If you left your business permanently, could it continue with minimal disruption in your absence? Would this be true whether your absence were due to a lifetime decision or your death?
- If you left the business permanently, could your designated successor run the business with minimal disruption? Would this be true whether your absence were due to a lifetime decision or your death?
- If you sold the business for its full value and received cash today, would your income continue for your and your spouse’s lifetimes with minimal disruption? Would this be true whether your absence were due to a lifetime decision or your death?
Once advisors engage business owners in Exit Planning, owners begin to (a) understand the gap between existing resources and capabilities, and those needed to permit a successful exit; (b) see that the same gap exists if they die; and (c) act to bridge the gap.
Advisors must include estate-planning professionals in their networks of professional advisors. They should look for professionals who see the value in linking lifetime (i.e., Exit Planning) and estate-planning goals, and have the expertise to create business continuity arrangements that are consistent with estate-planning solutions. They play an important role on every Exit Planner’s Advisor Team at the beginning and throughout their Exit Planning engagements.