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As advisors, most of us leave any discussion of how an owner’s death will affect his or her family and business to our estate planning colleagues.
An exit via death is not a topic that owners want to consider or discuss so we move the item to someone else’s agenda.
Let me suggest that if you are to be a trusted advisor as it relates to owners’ business exits during their lifetimes, you must play a role in protecting their families and businesses from a business exit due to their deaths. To offer candid and valuable counsel, you don’t have to be an Exit Planning expert, but you do have to initiate the difficult conversation about protecting the owner’s family and business.
This article, and the next several, will not turn you into an estate planner, but I hope you’ll gain a better understanding of how the tools you already possess to craft lifetime business exits are the same that you’ll use to take some of the sting out of an owner’s “ultimate exit.”
Death Is Not Kind
Most of us have experienced, first hand, the fall out that both businesses and families experience after an owner’s unexpected death. The owner’s primary goal—financial security for family—is often buried with the owner. That is a tragedy in itself, but it is an avoidable tragedy because advisors can prevent it.
Think about your owner-clients for a moment. If they unexpectedly die,
When Estate Planning Is Not Enough
An owner’s lifetime goals and aspirations for business and family are at the heart of Exit Planning. As an advisor who helps owners care plans to achieve their lifetime goals, you must work to make sure that owners achieve the same goals should they die. In fact, if you sit by while owners engage in estate planning without a clear focus on their lifetime exit goals—and what it takes to achieve them—their estate plans will likely fail, and some will fail miserably. Consider the case of Ralph Cabrini (a fictional owner).
After months of conversations, Ralph Cabrini’s insurance advisor finally convinced him to “get an estate plan.” Ralph was married, had two young children and owned a thriving general construction company. He had a couple of key employees who managed all of the company’s projects.
As part of the discussion, the estate planning attorney suggested to Ralph that he consider doing something (from a lifetime planning standpoint) to ensure that his two key people would stay with the company for the long haul. Ralph, with a wave of his hand, dismissed the idea. "I don't worry about them leaving. I pay them plenty."
Two months after signing his wills, trusts, powers of attorney, and related documents Ralph died. “Fortunately,” the insurance advisor and estate planning attorney thought, “at least his estate plan is in good shape.” But they were wrong. Three months after Ralph’s death the business and his estate were bankrupt.
Shortly after Ralph's death, his two key employees realized that the business could not survive without him. While they felt badly for Ralph’s family, they decided that their first responsibility was to support their own families. They found jobs with new employers who had contacted them shortly after Ralph’s death. Without their supervision, the projects the company had underway faltered. Lack of progress put the construction contracts into default, and the bond company eventually foreclosed on the company’s assets. The bond company then threatened to file suit against Ralph's estate for the bond default.
Ralph’s estate plan worked, insofar as it properly transferred his estate at death to the intended beneficiaries. The problem was that there was nothing to transfer. The business and the value of Ralph’s estate had evaporated.
How would you have made sure that, in the event of Ralph's death, his company could have:
Your starting point, as it is in all aspects of Exit Planning, is to ask questions. In this case there are four questions that you must ask and owners must answer:
“If you die or become permanently disabled tomorrow:
Had Ralph’s estate planners asked the questions and pushed him to answer them, his family and business would not have suffered as greatly.
Ralph’s sad end teaches an important lesson: Exit Planning and estate planning are inseparable for business owners. Few estate planning advisors are trained Exit Planners and few Exit Planning advisors are well-informed regarding estate planning. As a result, we leave Mack Truck sized holes in owners’ estate planning and Exit Planning.