0:02 Who are you and where are you going? What do you want? [Music] Hello and welcome to Trust and Estates Weekly. I'm your host, Kevin Bemmel, and I'm here every Monday at 10:00 a.m. Pacific time to talk about estate planning and trust and probate administration. primarily from the standpoint of professionals like myself. I'm a professional fiduciary and independent
0:38 trustee, but also for those of you who are perhaps in your own uh estate planning process and you want to be able to talk more competently with your advisors, understand better uh what the issues are so that you can make sure that your own financial situation is is being properly taken care of. And so today I'm going to be talking about a situation. It doesn't come up in every estate. Um but when it does it it poses a a set of problems that um can be very
1:19 difficult to handle. And that is when there's a business in particular a family business that's part of the estate. and when there hasn't been any or sufficient planning for what's going to happen with that business when um when the the the the key person the owner uh passes away. And so um I put together a list of about eight or 10 um uh issues that I think need to be considered um based on my experience. I
1:54 can tell you as an administrator, a lot of my time administrating an estate goes into dealing with a business um if there hasn't been proper planning. Um I will also say that that additional time typically does not fall within the standard duties of a personal representative for an estate. And so it can significantly increase the cost of administrating that estate which of
2:30 course in the end means there is less left for the heirs. And so if if you are a business owner or if you're a professional and you have clients who are business owners, it is not sufficient merely to include the business as one of the assets of the estate. There needs to be other things done to make sure that the the the business is dealt with properly, efficiently, and cost effectively as as part of the
3:08 administration process. And that's true in this case. It's true whether the the uh ownership of the business is an asset in a trust or whether it's an asset under a will or worst of all uh the the owner died in test state. So merely because le let's just take a quick example here. merely because a business, let's say it's a corporation, and the owner of the business transferred ownership of the stock in that corporation to his trust. Okay? So now the trust owns the business or owns at
3:44 least his share of the business. Well, that's fine. The business won't have to go through probate, but merely that it is now an asset of his trust does not say anything about what's going to happen operationally with that business. And that's real that's where the rubber hits the road to use an an old expression, right? If they're if there are clients of the business and they're expecting service or they're expecting products and as the result of of the owner dying, now some of those processes break down.
4:22 They don't happen as quickly. So all of that uh becomes problematic. it can have a significantly negative impact on the operations and the value of the business. Okay? And that's why the personal representative or the trustee needs to step in and quickly get it get it under control. Um if for no other reason than to maintain the value of the business and even if the plan is it's decided that the best plan is to sell the business. Okay. Um, and I would add, by the way, that you may designate in
4:57 your trust that the business is to be sold. Um, but if there isn't a plan for how the business is to be sold, and if there isn't a plan for how the business is to be run while the sales process is taking place, so you're still back to many of the same problems. Okay. Now if it's some kind of uh sale arrangement where when the owner dies it triggers an automatic sale of the business to the remaining owners and there is a process triggered for valuing what the price of
5:33 the sale of that interest is. Okay. So now we're getting into the realm where there's been proper business planning and so little if anything that I'm going to talk about today would apply. The problem is is there are so many businesses where that level of planning has not been done. And so now what the what the personal I'm going to use the term personal representative that can be a trustee or an administrator. The personal representative is left with a mess and now has to deal with that. Okay. So, I'm going to talk about some
6:09 of these issues and and uh hopefully that'll make the the concerns that I'm expressing clearer. So, um whenever there is a business as an asset in an estate or trust, the issue is going to come up of first of all, is it going to be a taxable estate? Okay? And and if you've watched other episodes of my show, you know that just because assets have been transferred to a trust, that does not exempt them from estate taxes. Now, with with the passage of of the the
6:45 the the so-called big beautiful bill um a couple of weeks ago, the the the sort of current estate tax regime is staying intact. And so, uh, for a married couple, the exemption from estate taxes is, you know, edging up to about $30 million. So, uh, it it may be that, um, the estate is not going to have to pay any estate taxes. Okay? And so, the necessity of of understanding the value of the BR business is not necessary for
7:22 estate taxes per se. However, like any other asset, the value of the business or I should say the basis of the business gets stepped up upon the death of the owner or even one of the owners. So his the bases in his ownership will be stepped up and that can be important because down the line whoever ends up owning that part of the business or the business as a whole if it's wholly owned by the deedent they may sell the business and so it will be
8:00 necessary to know well what is the basis or in this case because of the the death of the owner what is the stepped up basis based on its value as of the date of death of the owner. And so, as a result, the business is going to have to be valued. Okay? And the personal representative would typically be the one to to arrange that. Now, the the the issue of a business valuation, it's different than a real estate uh appraisal, which I think a lot of people are familiar with that. You call up the
8:36 appraiser, he comes out, he walks through the property, he does his work, he sends you a report, kind of done. Now, uh, with with a real estate, I'm sorry, with a business appraisal, it's much more like a commercial property appraisal in that the appraiser is going to need books and records for the business in order to properly understand its value. So the methodologies are essent essentially the same. There's a sort of a market value approach and there are income uh based approaches for
9:13 valuing businesses. Most businesses are going to be valued on an income basis. Um and that's because what someone would pay for a business is largely based on what kind of income that business generates. Now, it is common, especially if someone is the sole owner of a business, to run expenses through that business that benefit the owner, um, but are not necessarily relevant in the valuation of a business. Okay? They
9:49 may be perfectly legitimate from from a a tax standpoint, but from a valuation standpoint, those expenses need to be excluded. Okay? And so there's going to be a need on the part of the appraiser for pretty detailed income and expense reports on the business in order to understand the income and and bottom line of the business and be able to get to a proper valuation of that business. And so it will take more time and effort
10:24 to get that typically than it does with with even a piece of commercial property. The other thing is often times the the end value of the business may turn out to be pretty small. Okay, that being the case, the appraisal fees oftentimes seems seem very high relative to the value. And it's because there's a certain amount of work that has to be done to appraise that business that has nothing to do with the value. And so, in fact, I I uh had to have a business appraised for an
11:00 estate I'm I'm administrating. And in the end, I think the value of the business was like, I don't know, $250,000 or something like that. And the appraisal fee was close to $6,000. Now, from a real estate standpoint, that fee is outrageous. You would never see that high a fee on, you know, even like a little maybe a little duplex, you know, that sold for $250,000. But the reality is is it is it's as much work to appraise that $250,000 business as it is to appraise a $5
11:35 million business. The process is the same. the work in reviewing and and adjusting income income and expense reports is the same. And so from from from the standpoint of business appraisers, they charge the same amount. Okay? And so th this is one of the challenges of business appraising. Um but you know it has to be done and and so it it will be right and there unfortunately in general there aren't a lot of shortcuts. Okay. Now, if a business uh is very small and and if the
12:13 IRS is not going to be scrutinizing the business appraisal, so then maybe you can go to a business broker, someone who specializes in selling businesses and have them do just kind of a a rough business valuation. That may be good enough and that could that could save money. And for someone who for a personal representative that may be a better way to handle things looking at the overall situation but it is going to be a judgment call as to how such things are handled. Okay. All right. So again, one of the first um you know added
12:50 problems of a business being part of an estate is there's going to have to be a business valuation and that's likely to be a more complex uh problem than it would be for uh for real estate. So okay, so that's that's number one. Um number two, and I mentioned this already, continuity of operations. So in the short term, continuity of operations is probably the most important problem raised by a business that's part of an estate. And the reason is for the what I said a few
13:26 moments ago. Whether the business is whether the estate decides that the business should continue, whether the estate decides the business should be sold or the the estate may decide that the business should just be wrapped up and closed down. until those decisions are made. Okay, the business should not be allowed to to deteriorate. Okay, so the for example, the decision to wrap up a business shouldn't happen because there was no
14:02 continuity of operations and so by the time the personal representative got around to dealing with the business, there really wasn't any business left. Okay, that is not proper administration of a business in an estate. And so, uh, you know, there's going to be issues of personnel, payroll, clients, customers, contracts, suppliers. All of that is of course is going to depend largely on what the business does. Um, but there's also there may also be a
14:37 leadership gap. Okay. Now there are many businesses where the owner is really the rain maker in the business. The one who is responsible for generating all the income and if that person dies. Okay. So now who's going to generate the income? Well the answer to that may be no one. And that may be why the best decision is to just wrap up the business and not go on uh you know bearing expenses etc. trying to keep some a business afloat that in the end is not viable. On the
15:13 other hand, the business may be providing services to the estate. Okay. Um so uh so so in that case the business may need to continue operating at least until the estate can uh engage another organization to take over those duties. Okay. So, um let's say that you have a business, an estate um that that includes in it a some sort of um uh horse ranch, okay?
15:50 They they breed and uh train horses, right? And uh look, horses have to eat, they have to be they have to have water, they have to be exercised, uh you know, they have to, you know, have uh you know, veterary care, etc. So if uh and and in fact, I dealt with an estate like this many years ago. uh the the the the business had to continue otherwise the horses would have died and the business really wasn't any particularly valuable asset
16:26 to the estate but the horses were they were a very specialized type of horse and they were quite valuable and so it was necessary for this estate to continue operating the ranch functionally to make sure that one of its most valuable assets the horses survive, right? So, these are the kind of of issues that have to be dealt with and dealt with quickly by the personal representative to make sure that the value of the assets of the estate are maintained. Okay. Now, there may be some
17:02 uh special court approvals uh that are necessary to take certain steps. Okay. that that would depend on the precise circumstances of the estate or of of well in a trust that would be much less likely. Um but that's something a personal representative is is going to need to examine as well. Okay. Uh the other thing is the personal representative may not have the experience necessary to be making decisions about that business. Now, I was not the administrator on this example I gave you with the horse ranch.
17:38 I was I was actually uh the the real estate appraiser. This was in another time in my career. Um if I had been the administrator, as much as I would love to have run a ranch, um and I I I loved that property. I loved being out there. Uh I was not qualified to be making decisions about running a horse ranch. And so to the extent that the deedent was also the one essentially operating the business, I would have had to bring someone in who had the expertise. Now I
18:15 will say in this particular case uh the owner's uh daughter and I think his son were very involved in the business and so they they took over the operation of the business uh w without their father once their father passed away and it was pretty pretty seamless. uh but but that is not always the case. There aren't all there aren't always people who can step into the place of the deceased owner or the deceased you know CEO or whatever and and continue with reasonably seamless operations. And so in that case some sort of interim CEO with the proper
18:51 uh knowledge and experience may need to be brought in by the personal representative in order to ensure continuity of operations. So number two again continuity of of operations. Okay. Uh number three so the the personal representative the executive the administrator the trustee. Okay. Uh may need special authority to act. Okay. It it really depends on as I was saying a moment ago the precise uh situation. Okay. So, um, the court may choose to
19:29 limit the personal representatives, uh, power to run a business, um, unless it's specifically authorized by the will or there is a petition to do so or, um, it, you know, if it's a trust, the court is not necess is typically not going to be involved. However, let's take a case where the business is owned, let's say, by by three people. Uh, one of whom uh has transferred his interest to his trust. Um, and and now he dies and so his
20:06 trustee is is administrating the trust. Okay. Now the other two co-owners of the business may dispute whether the trustee has the authority to act on behalf of the business. They may be willing to in essence stipulate well okay the trust is now the owner of this share of the business and as the trustee you essentially are you know acting on behalf of the owner the owner of of that portion of the business but that doesn't mean you can step in and take the place
20:42 of the CEO who's now dead okay and so the trustee may need to go to court and say you know your honor there is no succession plan for this business. And um it's not in the best interest of this trust and the beneficiaries of the trust to allow the other co-owners to take over operation of the business um without um either me or someone appointed by me uh to have their say as to what's going to happen with business operations. Okay. So again, the
21:18 authority to act may need to be something obtained from the court unless it is specifically in the documents. And by the way, just because it's in that owner's trust doesn't mean that that is binding on the other two co-owners. So unless there is a some sort of business continuity plan developed by all three owners and that continuity plan specifies that you know the trustee of my trust is you know authorized to to be in my place instead
21:55 upon my death with respect to operations of the business. It's entirely possible the other two co-owners could object to that and they would, you know, I'm not a lawyer of course as you know, but there may be reasonable grounds uh for that objection. Okay, this again, you know, I'm going to be repeating this throughout this show. This is why it is so important to properly plan business continuity as part of an overall estate plan. Okay, let's take a break. When life brings unexpected changes,
22:32 managing inherited property shouldn't add to your stress. Magnum Properties specializes in probate and trust real estate management. We handle the complexities while you focus on what matters most. From property maintenance to tenant relations, from legal compliance to maximizing value, we're your trusted partner through every step. Magnum Properties, Inc. turning property challenges into peace of mind. Call us today at 213264396 or visit magnumprops.com.
23:12 Okay. So, this is Trust and Estates Weekly. We're talking about what happens when there's a business, in particular, a family business that's part of an estate. And I I mentioned before the break there there uh first of all there's probably going to be a need to value the business which is going to be typically more involved than valuing real estate for example. Continuity of operations is going to be a very important issue especially in the short term and the personal representative may
23:47 need some kind of court authorization to deal with the business especially continuity of the business um if there isn't if proper planning hasn't been done. Okay. So other issues that uh are part of um administrating a business in a a probate or trust. So um business debts uh may need to be identified. Now depending on the structure of the business, the debts of the business may
24:22 not be a debt of the estate. Okay? So you know in the in the early days of administrating an estate you you know you the personal representative may be getting creditors claims. Now, if a creditor uh um submits a claim against the estate that actually is against a the bis a business and if that business is a separate entity, let's say it's a corporation, doesn't matter whether it's a a C or an S corp, those are separate entities or an LLC, again, separate entity, uh a partnership, separate
24:57 entity. Okay? That debt is a debt of the business, not a debt of the estate. Now, if the if the business was run as a sole proprietor and and it was the the taxes for the business were paid on a schedule C in the uh business own in the business owner's personal tax return. So now effectively the the debts of the business are the debts of the estate because there is no distinction between the business and the deedent. Okay. So dealing with debts is a more comp a more
25:36 complex issue when there's a business involved in an estate and those but just like anything those debts need to be identified. They need to to be uh prioritized. Okay. Um but let's say that for all intents and purposes with upon the death of the owner the business is rendered insolvent. Okay. And let's say let's take a business ABC incorporated. Okay. Not the network just just XYZ Incorporated.
26:11 We'll say not so nobody you know thinks I'm making an example of any actual company. Okay. XYZ Incorporated. Let's say that with the upon the owner dying essentially the value of the business drops to zero. Okay. And let's say it had outstanding debts and liabilities of u $300,000. Um but maybe it had the business has cash on hand of only $50,000. Okay. and and the business is is not going to be continued by the estate
26:46 because it doesn't make sense to continue it. Okay? So, $300,000 in debts, $50,000 in cash and and in salailable assets, whatever, there's still $250,000 in debts outstanding. Okay? It may not be the case that um assets from the estate can be used to pay off the assets of the business because the estate and the business are separate entities. So unless there's some sort of personal guarantee on those debts on the part of the deedent, the estate may not be permitted to pay off
27:22 those debts. Okay? Again, do you see the complexity here? Okay. So there has to be a very clear distinction uh to you know which entity has has incurred the debts what assets apply to which entity all of the very careful accounting of all of that needs to be done. Okay. And to the extent that a creditor to the business to a business that is a separate entity is trying to claim make a claim against the assets of the estate itself that that uh creditor claimant
28:00 may have to be that creditor claim I mean may have to be fought. Okay. It's it's generally not within the discretion of a trustee or a personal or other personal representative uh to pay debts that aren't relative to the entity that they represent. Okay? And in fact, to do so would be a breach of fiduciary duty. It would be no more proper for me as a trustee of a trust to pay, you know, the debts of my my company than it would be
28:35 for me to pay the debts of a company that is partially or even completely owned by the trust if there's no personal guarantee of those debts. Okay. So all of this has to be very carefully examined to make sure that there's no breach of fiduciary duty on the part of the personal representative and to make sure that the heirs are you know getting their their you know proper uh proper inheritance. Okay, that's number four. Number five, um succession planning or
29:11 sales. So, I've mentioned this a little bit in passing um already, but um there has to be a determination as to what's going to happen with the business. Now, this issue presumes that there what is not a proper business succession plan. The best way to handle this issue is even if you're a even if you're the sole owner of a business to make sure there is a proper business plan. So, let me give you an example. Let's say that um
29:46 you have a business. You've you've always been the sole owner of the business, but you have a couple people who have worked with you in that business for years and years and years. Okay? They've grown up with the business. they're essential to its operations. They're very knowledgeable about the business. Okay? And then you die. What's going to happen to those two people? Okay. Now, there's there's lots of ways it could be handled. one is the business could be sold, but but I would argue morally, if no other way,
30:25 those those two long-term employees should be provided for um for having dedicated their lives to your business. Okay? And now outside of a provision in in a will or a trust or in some sort of succession plan for them to have some sort of benefit upon the sale of the business. A personal representative is not going to have the authority to do so. Okay. Now another thing is maybe at the time of your death they're qualified to take over running that business. And so
31:00 there'll be a but then again what you know a succession plan needs to be created whereby they know that that's what's going to happen and your the representative of your estate knows that that's what you want to happen. Okay. Now maybe at the point of your death one of your relatives or heirs is going to take your place. Okay. Now, hopefully that person is qualified, okay, and won't be viewed at by the long-term employees as, you know, someone who doesn't know anything about
31:36 the business and gosh, why do they get to come in here and start telling us what to do? We've been here for, you know, 20 years or whatever. All of this should be dealt with in a succession plan for the business. This is a apart from your estate plan that's dealing with your assets and all that all those things and like any good plan your estate plan included which should be socialized with your heirs. A business succession plan should be socialized with key employees. If you have co-owners of the business it of course needs to be drawn up in
32:12 concurrently with them, right? Because it affects them directly. Okay, that's the best way to deal with this problem. If there is no succession plan or if the succession plan is unclear or ambiguous or whatever. Okay, now your personal representatives uh flexibility in dealing with this issue is reduced. It's attenuated. Okay. and what options he may have may not among them may not be the option that you actually preferred but because there
32:48 isn't a proper succession plan is is you know not available to you. Okay. So um there may need to be some buyell agreements there may need to be operating agreements. There may be may may need to be shareholder agreements or or um membership uh you know uh agreements depending on the type of entity. Okay. All of this should be created in advance as part of your larger estate plan. Okay. If they're not, all of these are going to have to
33:23 be dealt with by your personal representative. and there's a significantly higher likelihood that the court will have to get involved and now that takes a lot more time a lot more expense c can cause a lot of bad feeling. Okay. And so now you know here here here you are. Okay. So succession planning should be a part of of your estate planning. Okay. Uh, another issue that I've alluded to a little bit but I want to talk about in more depth is the ownership structure matters. Okay, so is
33:59 the business a sole proprietorship? Which means there is no legal distinction between the business and its owner. Okay, the flesh and blood person who owns it is in fact the business as well and there are lots of sole proprietorships around. Okay, that's as distinguished from a partnership, an LLC or a corporation. Okay, all of which are separate entities from the owner or owners. Okay, now they all have their reasons for existing.
34:36 They all have their uh different aspects of how ownership works. So for example, a limited partnership has at least one general part in general has at least one general partner uh who has the uh authority to manage the business on a day-to-day basis and it has at least one limited partner who is essentially an investor and their only liability to that business is the extent of their investment. And as a result, they are prohibited from being involved in the
35:13 day-to-day operations of the business. Okay. The general partner has the authority to run the business on a day-to-day basis, but also has unlimited liability. Okay. So, you know, do you want to be a general partner? Are you know is was the deedent a general partner? So, now this whole issue of who has responsibility for debts comes up again. if he was the general partner and there are debts to that general partnership and maybe they exceed the assets of the I'm sorry um there are debts to that partnership. It could be a general partnership or it could be a
35:48 limited partnership. So now because general partners have essentially unlimited liability for um the operations of that partnership, those debts may reasonably be considered claims on that particular deedence estate. Now these are complex legal issues and even as an experienced administrator I would not be making these assessments on my own. I would be I would be have getting competent legal
36:23 advice because there are lots of nuances in these things. Um it there there hopefully is a partnership agreement that spells some of these issues out. Okay. there the the documents that evidence the debt that may also have something to say about it. And although I think I'm a, you know, reasonably, you know, smart guy and I I have pretty good reading comprehension, I wouldn't rely solely on my reading of documents to make a determination as to whether the
36:58 ownership structure um either shielded or did not shield an estate from debts. Okay? Even in the case of a corporation, okay, where no one in that corporation has u personal liability for the debts of that corporation, at least seemingly so, which is one of the reasons why corporations are formed. That may not in the end be the case. Okay? There may be some sort of personal guarantee that an officer or shareholder or director of
37:35 the corporation made in order to contract a debt. And so that may in essence not literally pierce the corporate veil, but it may change uh the the rights of a creditor to claiming that debt. Okay. Now, that that's one of the issues that we've already discussed somewhat. Another issue may be how how can the business be sold? Okay, if it's a sole proprietorship, the way the business is sold is going to be different than if it's, let's say, an
38:12 LLC. An LLC, in an LLC, the the member or the members can sell their membership interests presumably. Now there may be restrictions on that that are in the operating agreement for the LLC. So for example, there may be what amounts to a sort of a buyell agreement in the operating agreement of an LLC that requires if a member dies it may say that the member's you know spouse or heirs may not take over membership and indeed the deceased member's estate is
38:49 required to sell that membership interest to the surviving members. Okay. So, all of these things can happen. Okay. Now, we're we're I should have maybe I should have said this at the beginning and hopefully it was understood. We're really talking about closely held companies, meaning businesses that are not being traded on a public exchange. None of what I said applies if you own stock and let's say, you know, AT&T, right? If you just if if if if you you know you just own a thousand shares of
39:25 AT&T stock or maybe your trust owns a thousand shares of AT&T stock. Okay, there's there's no there's no succession planning, right? You just have a a small ownership in a huge corporation and and that stock depending you know you the estate may hold on to it, it may transfer it to an heir, it may sell it if it needs liquidity. Those are really the only decisions on a publicly on the ownership of a publicly traded business. But on a closely held company where it's not publicly traded, all of these issues become relevant. Okay. So, um ownership
40:01 structure matters, the documents become even more important. Even if there wasn't formal succession planning uh of of a business, there may be an operating agreement or there may be other agreements that weren't done specifically for succession planning, but still could impact how the personal representative handles the business. And so all of those need to be uh reviewed. competent advice needs to be uh um needs to be um gotten
40:36 and um and then the proper decisions made. Okay. Uh let's let's take another break. Probate and Trust TV, your curated source for the most useful and insightful content on estate planning and trust and probate administration, featuring standout professionals like Bill Gross, Paul Bralet, James Cunningham, and yours truly. Whether you're a lawyer, accountant, real estate professional, or working on your own succession plan, this channel helps you
41:11 quickly find the clearest, most practical content YouTube has to offer. Subscribe now to Probate and Trust TV. Spend more time learning, less time searching. Okay, so this is Trust and Estates Weekly. We're talking about what happens when an estate contains a business, a family business or uh a closely held business is is probably how what I should have uh titled this this episode. Okay. And I've talked about a number of points. I I'm I'm not going to review
41:47 the the um six points I've covered already because u I want to make sure I have time to cover the other four that I have. Okay. So uh next is tax implications. So the uh the death of an owner of a business or a co-owner of a business, it could trigger a number of taxes. First of all, as I mentioned at toward the beginning of the show, it could trigger estate taxes. Okay? So depending on the value of the business and the other assets in the estate, whether it's a trust, whether it's uh an estate out out that's not within a
42:24 trust, if if it doesn't matter. The trust again does not um mean that that estate taxes don't have to be paid. So the the gross value of the estate um needs to be determined. any debts uh may may be subtracted depending on the nature of the debts. That's for your accountant to advise you on and then you know the the the the taxable uh value of the estate needs to be determined and if it falls under the exclusion amount okay
42:59 so you don't have to pay estate taxes. uh but um other but if it if it exceeds that amount and if it and if there's a you know a successful business there uh it might so then um now estate taxes are due. So that's that's one issue. Um and again because it's more complicated uh um uh appraising a business. Okay. Um, it does give the IRS more wiggle room to assert that the valuation of the business was not properly done. Okay?
43:36 And so if you think that if if if as the personal representative or an heir to the estate, if you're thinking that the value of the business may be the determining factor or may be an important factor as to whether um an a an an estate may be taxable or not. So then the quality of the business appraisal and the qualifications of the business appraiser loom much much larger. Okay. You'd be well advised to
44:12 find someone who has experience not just in appraising businesses but in appraising businesses for estates and dealing with them in front of the IRS. Because if the IRS decides to take an aggressive posture, you're you you're not you don't want to be the one where your business appraiser is learning how to handle the IRS. Put it to you that way, right? So that they have experience doing that will put you in betterstead. And in fact, if they have a reputation, look, in in in the end, we talk about the IRS as this sort of big huge
44:49 amorphous, you know, department of the government, and indeed it is. However, the estate tax uh unit within the IRS is relatively small. Okay? And they after a while um the more experienced auditors, they they they know who is a credible appraiser and who is not. Okay? So to the extent that you're dealing with someone who routinely is appraising uh businesses uh for uh estate tax returns that are being submitted to the IRS and
45:25 and and hasn't had their valuations challenged or maybe has had them challenged occasionally but but has always prevailed. Okay, that person, even though they may be more expensive, may be a better way to go in terms of valuing the business. And by the way, the fact that they don't get challenged by the IRS may be a reason for paying them more because once you get into a, you know, a level two or worse audit with the IRS, now the money that you're
46:00 going to spend potential, you know, potential money that you're going to spend defending your position may far exceed the additional fee that the more experienced and and more competent business appraiser would have charged you. Okay. So, so that needs to be taken into account. Now, with respect to the business, just because you know the the the owner died, um doesn't mean that all of a sudden the income from the business is no longer taxable. So again, if if it's a sole proprietorship, that income
46:36 is going to flow through to the uh the owner's final personal tax return and then after that, the income from the business is going to be income to the estate most likely if it's a separate entity. So that entity is still going to need to file tax returns. Okay? And if it has, depending on the type, if it's a pass through entity, the income is going to pass through to the ownership, presumably the estate. if it's a corporation, an escorp, so the entity may need to pay income taxes. Okay? So, all of that needs to be dealt with. Um,
47:12 and all of those tax returns need to be filed. They need to be filed by the proper deadlines. You, you know, there are extensions available and you may need them if the early days of administrating an estate are somewhat chaotic. Okay, it's perfectly fine to ask to to apply for legitimate extensions. Okay, what's not what's not fine is to just ignore all of this stuff. You can't ignore the tax implications. Okay, and keep in mind uh it's not just federal taxes that need to be dealt with. There are uh state taxes
47:48 in many cases that need to be dealt with. Now, some states don't have an income tax. Uh Florida, I think, and Texas come to mind. Um but that doesn't mean that there are no taxes due from these businesses. Okay? The businesses may need to pay property taxes. They may need to pay sales taxes. Okay? There may be other types of taxes. There may be tariffs that they need to pay. The again the owner dying does not magically make these tax liabilities go away. Okay. By the way, if a business is held um and and you would want to you would want to
48:25 uh uh check with an your you know your estate uh accountant to to be you know absolutely clear on these. But if a business is held for a certain period of time after the owner dies and then is sold, it might be that capital gains taxes may be uh may have to be paid on the sale of that business. if there was a gain um over and above the stepped up basis in the for the business as a result of the owner dying. Okay, so there's another tax again and that could be on both a federal and
49:01 state level. So the bottom line is you need a very competent estate uh accountant who deal with estate taxes and other taxes that an estate might have to deal with. Okay? and your regular accountant. Maybe you have an accountant who's always done the taxes for your entity, for your business entity or I I should not for your for the business's entity. Okay, that accountant too needs to be at least somewhat knowledgeable about the impact
49:36 of an owner dying and may have to coordinate with the accountant for the estate. Okay. um the the the you know accounting is very much like law accountants specialize okay and so they don't always know the details of the different areas and so that's where collaboration will make a big difference okay next employee and vendor relationships so this is another thing I mentioned in the very beginning these have to be maintained okay the death of an owner uh is likely to cause uncertainty It may incentivize key
50:14 people to leave the business because they don't know what's going to happen or because there isn't a clear succession plan. They're anticipating they're going to get cut out or overlooked or whatever. And so this is something that needs to be dealt with immediately. Okay. Um and um whether it's the personal representative or maybe the lawyer for the business. Okay. If you're the personal representative, or let me put it differently, if you're the potential personal representative, okay, but you have not been officially appointed, you don't have letters of administration, you don't have the
50:50 authority to act on behalf of the business or the estate or anything, but you can get in touch with the business's lawyer. Maybe it has corporate counsel outside or inside and that person may be willing to step in and you know caution, calmness, restraint, buy you some time until you until the personal representative is officially appointed so that some reasonable plans can be made for business continuity etc. Okay. But, you know, we we we we I tend to
51:27 focus on financial issues on on my show, but from time to time, the non-financial, the emotional issues loom very large. And this is an area where that is certainly the case. When you're talking about um employees, maybe the business with the owner dead, the business doesn't even have the ability to pay them. Okay? I had that come up in an estate um I've administrated and you know the business I and I didn't have authority to I was the proposed administrator. I didn't
52:03 have letters of administration. I I asked the lawyer to step in and assure the employees that they would be taken care of as quickly as we could and and as a result they were willing to hang in there. It was crucial for business continuity. You know this but the same thing can be true of vendors. They're not directly working for the for the business but they could be crucial to its continuity. Same same kind of issues. Okay. So failure to maintain these these these vendors,
52:38 employees especially key personnel, customers could all be a big big problem as I mentioned before. Okay. Next, uh, licensing permits and legal compliance. So, today there depending on the business, there may be numerous permits that a business needs to have to keep operating. If it's a restaurant, there are health permits and fire permits and business licenses and and all of that stuff. All of that needs to be maintained. Okay? And the fact of the matter is depending on how aggressive the
53:14 jurisdiction is and how diligent the owner was in maintaining proper permits, uh, you know, the the regulatory authority may be more or less agreeable if because of the chaos of the owner dying, uh, a permit or a licenseaps. Okay, but this is again this is one of those key issues that really needs to be jumped on when the owner of a business dies. Um you know in in in one case um I
53:51 had a situation where the city um dinged the owner of a property. Um I I don't recall why I I but um I wasn't actually I had been proposed as the administrator but I hadn't the court hadn't officially appointed me. Um and so I had to ask um my lawyer to step in because I didn't have the authority. My lawyer at least could say my client is in the process of being appointed. there's no one who can act on behalf of the ownership of the
54:27 property yet. Um we just need some time to get the court to get this set up with the court and then we will address your issue as soon as possible. Um and fortunately the city agreed to sort of hold off on any further adverse action uh while that you know while I was getting appointed and that was important because cities and in this case it was a city a municipality they they can oftenimes take uh very drastic steps against a property owner and that's not for the good of the estate. Okay. And then finally, um, and this is another
55:02 one of those emotional issues, uh, the potential for dispute among heirs or co-owners is particularly high, uh, when there's a business as an asset to an estate, a closely held business as an asset to the to an estate. And it's for all of the reasons that I've mentioned. So be you know when there is not a clear succession plan uh where there isn't a a sense of what's going to happen to this business who's going to be involved
55:37 who's not going to be involved. Okay. So you may have a business where uh one of your children is involved with that business uh and has been you know a a large part of its ongoing success. And you may have another child who's never spent a day in his life being a part of the business, right? And now you're dead. Is it fair, as much as I don't like that word, is it fair that the business would be potentially split 5050 between the son or the child who's worked, you know,
56:13 and made a substantial contribution to the business to split equally that that child with the child who's never had anything to do with the business? Is that reasonable? Is it going to look reasonable to the child who's been working in the business? On the other hand, if you decide to give the business to the child who's been working in it, is it fair that the child who's getting nothing, I mean, is that does that look reasonable to that child? Right? So, all of these issues need to be thought about. They need to be discussed. Decisions need to be made.
56:50 Those decisions need to be socialized with the people impacted by those decisions. Okay? That's true of heirs. That's true of co-owners. All of this needs to be examined, needs to be talked about, and needs to be boiled down to a succession plan. People will deal much better with a succession plan that's in writing that they may still think is unfair than no succession plan. and decisions are made, you know, purely on a
57:25 financial basis, which is what in the end the personal representative will probably have to do. Um, and and that and then not take into account any of the emotional issues involved. People are much more likely to feel hurt in the second case and much more likely to take action as a result of that hurt. And so this this show is first and foremost about avoiding a situation where these kinds of disputes arise among heirs, among co-owners, etc. Okay? And and that
58:01 that's that's the message I want to leave you with. If you own a business, whether outright or with co-owners, get your succession plan done. Get with your lawyer. get with your accountant, get with the other people who are involved in the business, get this figured out, okay? And and in that way, avoid a lot of potential problems. Okay? So, thank you so much for joining me today. Love to see my live viewers on. Tomorrow at 10:00 a.m. Pacific time is my show, Business Lessons from the
58:37 Military. I hope you'll uh join me for that. And then on Wednesday at 10 a.m. is my show, People Making Money. So, I hope I will see you later on in the week. And uh once again, thank you so much for joining me. Wishing you a wonder, wonderful rest of the day. And oh, um real quickly before I sign off, um if you have any questions, comments, links to uh social media will be in the show notes when this episode posts on YouTube. So, please uh love to hear from you. And uh last before I sign off, uh
59:14 if you like this show um and you know of someone who could benefit from it, please tell them about it and encourage them uh to watch it or listen to it, would love to uh have them do so and I would very much appreciate your help in spreading the word. So once again, thank you so much for uh joining me and uh signing off as I always do. Marie darling, you are my bell. Courage at all times, my friends.