The planning beast is always lurking. Will you be its next victim?
By James L. Moore, JD, CExP
The primary focus of most entrepreneurs is running a successful business. For this reason, proactive planning often gives way to the demands of the day. This is understandable. Unfortunately, the failure to proactively plan in the following areas can have catastrophic consequences for you as a business owner and entrepreneur. But what exactly is the planning beast?
The Planning B.E.A.S.T.
Buy-sell agreement. The absence of thoughtful micelle planning can lead to loss of value, negation, and failed transition for your business interest upon a wide range of triggering events.
Estate planning. An improper or incomplete estate plan can lead to public disclosure of private information, faulty or unintended disposition of assets, tax inefficiency, and creditor and predator exposure.
Asset protection. All that you have worked for can be lost overnight in a lawsuit if your business and personal asset structures are not properly insulated from creditors and predators.
Succession planning. This can also be called exit or transition planning. It’s very important to establish a clear plan for the best-suited individuals to succeed you. This is important for both for the business and for your personal wealth. Failing to do so usually leads to material dissipation of each or both after your death disability or retirement.
Tax minimization. Tax inefficiency can lead to income and estate tax burdens in excess of 60% of what you keep.
Asset Protection: How to Tame the Beast
Make no mistake, the planning B.E.A.S.T. needs to be tamed. The good news is that it can be. It is also less difficult than you may think. To prevent the undesirable outcomes that are inevitably ignored by the B.E.A.S.T., you should address each and every component by implementing the following.
BUY-SELL AGREEMENT. A buy–sell agreement (BSA) is a powerful tool that most business owners overlook. If they do have one, it is normally deficient or outdated. The caps BSA is an essential tool to accomplish the following:
- restrict transfers
- allow certain transfers to permitted transferees
- clarify desired triggering events for purchase or sale
- provide a guaranteed market for ownership interests that are otherwise not marketable
- establish a purchase price or valuation method in advance
- establish payment terms
- assist with tax planning for both the buyers and the sellers
- avoid litigation by creating certainty
A caps BSA can be a stand-alone document or can be embedded in the entity’s governing documents. These can include an operating agreement, limited partnership agreement, or bylaws. To ensure that the caps BSA contemplates more contingencies than just the death of an owner, all of the following potential trigger events should be considered:
- Voluntary transfer
- Involuntary transfer
- Resignation (before a specified retirement date)
- Attainment of a stated return or economic threshold
- Loss of professional license
- Passage of a stated period of time
- Conviction of a crime
- Anything else that fits your unique circumstances
To be certain, it is better to address these contingencies now rather than when the event occurs. At that point, leverage on either side of the potential transaction changes dramatically. Acting now can save you a lot of headaches in the long run.
ESTATE PLANNING WITH LIVING TRUSTS. As a business owner, you need to have a proper estate plan in place. This is important whether you are married or single, young or old, apparent or not. In particular, you should have a core estate plan, centered around a living trust, that includes a few specific documents:
Documents You Will Need
Living trust. The primary dispositive document in your plan should be a living trust. This is a revocable document that does all of the same things and does it with respect to the disposition of assets and tax planning. There’s one key exception though – the living trust totally avoids probate. It’s always wise to avoid probate to maintain your total privacy at death, be prepared to prevent the shares of your business from being tied up in probate court, and minimize administrative expenses.
Pour-over will. If there are any assets you’ve failed to retitle into your living trust, then the pour-over will pour these individual assets into the living trust for administration.
Powers of attorney. If you are unable to think for, act for, and take care of yourself, you should appoint someone to be your agent in certain areas of decision-making. These include health care, property, and most importantly, business decisions.
While most people who engage in estate planning leave their attorney’s office with powers of attorney for healthcare and property, they rarely leave a special power of attorney for business decisions. The business is likely the crown jewel of the estate and the primary cash flow generator for the family. Additionally, the person best suited to replace you with respect to the business is likely a different person than your power of attorney for property. For these reasons, you should ensure that you also have this broader power of attorney in place, as well as instructions within the articles of your living trust.
Living Will. Don’t let the state get involved with end-of-life decision-making. Prepare this written directive from yourself directly to your own doctor. This clarifies your preference with respect to life-sustaining measures when death is imminent.
Asset Protection Planning
ASSET PROTECTION PLANNING-BUSINESS AND PERSONAL. First, with respect to the business, identify whether you have critical mass of risk or value. Where you do, isolate such risk or value in a separate company, such as a limited liability company. Stripping out investment real estate and equipment to lease back to the business, creating subsidiaries for different aspects of the business, and creating protective holding companies are all ways to minimize loss should there be a lawsuit against the business.
Second, on a personal level, each business owner should maximize exempt assets. He or she should also transfer non-exempt assets to asset protection vehicles. Exempt assets are assets in each state which are inherently protected. These can include: homestead rights, assets held in tenancy by the entirety, retirement plans, insurance, and annuities, among others.
Other assets you may have in your ownership interest in your business are not inherently protected. Therefore, protect them by transferring them to either a domestic asset protection trust or a limited liability company. When you do this, these serve as a protective shield around the asset in the event of a personal lawsuit or bankruptcy.
SUCCESSION PLANNING-BUSINESS AND PERSONAL. In order to ensure continuity in the business upon the occurrence of certain contingencies, the business owner should draft and formally adopt a written contingency plan. The plan should outline who has what authority to do what at which time. These business continuity instructions are crucial to the maintenance of your business in the event of any unlikely or unplanned-for event.
Provisions for successor directors and officers should also be included in the annual minutes. This helps to avoid confusion, conflict, or impasse upon the death, incapacity, or unanticipated departure of key owners. A formal shareholder agreement should also be used to ensure proper succession of the business.
On the personal front, succession of the accumulated wealth to generations below is just as important as the business itself. In order to have the best shot at passing on wisdom along with your wealth in a responsible and long-term legacy planning manner, you should consider the following:
- Have a transition plan in place in the event of your death or disability.
- Identify any desired changes in your investment strategy and your investor profile.
- Create family governance documents to establish successor management as well as detailed access parameters.
- Transfer wealth throughout the trust that contains customized and modifiable best interests distribution clauses and provides both creditor and predator protection for your downstream beneficiaries.
- Create a family limited liability company that will ultimately serve as a “Virtual Family Office” for your descendants. This preserves and manages your wealth with a business base and business discipline.
Proper personal wealth succession or transition planning is critical in order to convert your wealth into a long-term investment opportunity for generations to come. This is much better than fleeting inheritance in which you are merely reduced to a dollar figure at death.
TAX MINIMIZATION. Don’t pay unnecessary taxes. Structure your business and personal affairs intelligently under the prevailing law. This will allow you to benefit from the many opportunities the Internal Revenue Code provides. From an income tax perspective, you should call consult your CPA to engage in an annual Section 162 audit to maximize allowable business deductions.
One of the biggest deductions comes from benefit plans. For this reason, you should also consult your wealth advisor to maximize all allowable benefit and retirement planning deductions.
On a personal level, you can offset taxes by investing in tax-deductible investments or by making charitable contributions. In addition, you can also avoid current taxation altogether by taking advantage of tax-favored vehicles. For example, permanent life insurance and annuities.
With respect to estate tax minimization, here are three basic options for people who have a taxable estate:
- Pay them – either with your own liquid assets, or with life insurance proceeds if your estate is illiquid. This is most often the case with private business owners.
- Reduce them – either by straight gifting or through the use of various estate planning techniques and freeze taxing techniques that transfer appreciable assets outside of your estate including advanced estate planning techniques.
- Avoid them – either by diverting acquisition opportunities to the next generation during your lifetime or by contributing taxable assets to charity at your death.
Tame Your Planning B.E.A.S.T. with Asset Protection
Do you want a comprehensive asset protection plan? If so, it’s important to be proactive and aggressively address each of these planning areas. When you do this, you will have the ultimate weapon for taming your own planning beast.
Do you need help with asset protection? Schedule a meeting today. We want you to be ready. We’re here for you.