0:02 hello and welcome to trust and Estates weekly I'm your host Kevin bemel and we are here every Tuesday at 10: a.m. Pacific time to talk about matters related to your own Estate Planning and also those of professionals who help clients with Estate Planning and estate and Trust Administration so today I'm going to talk about is State planning it relates to business owners so there are some um
0:37 unique is probably too strong a word but there are some issues that the owner of a business uh needs to attend to that would be different than someone who is an employee and doesn't have the the same kind of responsibilities so I can tell you from personal experience that um when business uh when dealing with your business is not part of your estate plan it can cause a tremendous
1:12 amount of confusion consternation additional expense um even even a lot of bad feelings frankly um and uh and a lot of disruption uh to to the business so um it it's you know if if you are a business owner you are very well advised to make sure that and and by the way this does not apply only to people who are sole owners of a
1:48 business but if you have Partners or if you're if you own a business with in an LLC with other members of the business so those all of those situations or if you are co-owner of of a corporation especially an S corporation so all of those all of these things all of these situations require that you consider at least various aspects of what I'm going to be talking about um on on today's show so the first thing to consider if
2:26 now when I when I say a business owner what I what I I don't mean a situation where you are essentially a silent investor in a business so so for example if you are a limited partner in a limited partnership okay we we tend to think of those as owning real estate but a limited partnership can really own pretty much any kind of asset so if you are a limited partner in a in a limited partnership owned business then all you own is is an interest in the business and and in fact
3:02 as a limited partner you're not permitted to participate in the day-to-day running of that business if you do you may very well abgate your position as a limited partner and subject yourself to treatment as a general partner so we're not we're not talking about situations like that um now you could have somewhat of a similar situation in LLC where your involvement in the LLC is purely as an investor you have no active role in in the business
3:40 okay and in in that case aside from how the share of the business will be handled um there there you know there not a lot of this will apply most of this will apply um in a situation where you not only own the business but you are actively involved in running the business so so we'll look at it and where where an issue applies to um uh you know people who are just invested in the business I'll I'll comment on those um you know as we go along so the first
4:17 point I want to talk about is if you want to have a succession plan okay now obviously this is especially the case where you are the sole owner owner of the business and you run the business so in that case when you die both the person running the business and its owner is gone and so how will the business continue so you need to for example identify successors now that presupposes by the way that those
4:53 successors can step into your shoes okay so you may have other employees working in the business okay but if they haven't been given the opportunity the the training the experience to make the kinds of decisions that you need to make it may be difficult for them to be your successor and so in that case you may need to look outside the business to bring someone in maybe temporarily to bring the Insiders up to speed um so
5:30 that they're now able to run the business okay so all of this is part in parcel of of you know your succession plan now uh you know you you what would be especially if you want insiders to carry on the carry on running the business so then it behooves you while you're still alive to set up a training and mentorship plan so that they are ready to step into the successor role at
6:05 the time that you're no longer there now in addition to whatever training mentorship by by the way there may be a need for them to have certain licenses so if you're if you're a real estate business um you're and and you're the designated broker officer for the company right who is going to assume that role at the time you you die by by the way a succession plan is also a good idea even if you know you plan to at some point retire from the business but
6:40 have it continue operating right so who's going to take over for you in that licensed capacity and what what does it take for that person to do it so for example here in California uh in order to run most types of real estate services companies when I say Real Estate Services I mean um uh sales Leasing Property Management um those kinds of businesses you're required to have a broker a licensed real estate broker who
7:16 is responsible for compliance of of that business with real estate law now if the business is a separate entity then there has to be a real estate broker who's what's called as I mentioned a minute ago the designated broker officer for that company and they are charged with oversight on the company's behalf so if you have no one else in your company that has a license there is no even if you appoint someone to be your successor there's no one who can step into that role if you have people in your company who have a sales license again they
7:53 don't qualify to step into that role so now maybe as licensed salespeople they are eligible to apply for a broker's license but they would still have to do that uh submit all the documentation the fees take the test okay so again if there's any licensing requirements for your business it's it's important that you address that as part of your succession plan to make sure that should the successor need to step
8:29 in they have the um we'll call them you know legal or regulatory qualifications uh to do that you by the way similar situation for a real estate appraisal company you don't need a broker's license you need a real estate appraisal license and depending on the type of work that that appraisal company is doing if if for example again I'll use California that's the jurisdiction I know best California if if you if your company is going to appraise um anything other than
9:06 residential type properties you need to have what's called a certified General real estate appraisal license so if all the other appraisal appraisers in your office only have certified residential appraisal licenses and your company does work on Industrial retail office whatever they are not going to be able to do that work unless they have that uh higher level license now uh suffice it to say that just because someone has a
9:41 high level the same level license that you do as the business owner doesn't mean that therefore they have to assume the you know supervisory role or the or the leading role in the company a licensed broker can work for another broker a certified General real estate appraiser can work for another certified General real estate appraisers no no problem with that so as a matter of employee retention professional growth for your employees it's it's it's all um available I mean you should make
10:17 all of that available to your employees and and give them that opportunity for growth okay so that that's again this is that's an issue particularly if you are the one running the company or at least have a significant role by by the way you could be the designated broker oper uh broker officer of a real estate services company and still not be the CEO of the company okay now um what that means is there needs to be a successor
10:52 for you even though you don't have the top role okay so if you have an active role in the company a a a succession plan needs to deal with your role as well as other people who have an active part in the company okay so next is what's going to happen if the owner or part owner of a company dies so let's say you have three owners of a three members of an LLC who own a company and um you know if one of them dies what is
11:29 going to happen to that owner's share is it going to go to The Heirs of that owner or are there the remaining two members going to have the opportunity to buy out the the Airs of the deceased members estate okay so a buy sell agreement gives the um the remaining owners the opportunity to uh continue owning the business among them while making sure that the Heirs of the
12:05 deceased owner um get you know an appropriate payment for that owner's share of the business now this is particularly important where you have a situation where and I'm just using an example of three but it it could be two any number two or more let's say you have three people who own the business but are also actively engaged in the business now one of them dies okay and now you have what amounts to the estate which is a um just a an owner but not an active participant there's no one you
12:42 know the estate doesn't keep doing the things that the deedon was doing before right and so the other two members might look at that and say well it's not fair for the estate to continue to get let's say everybody owns a third of the business a third of the profits because the two of us are now doing half the work each and we're not going to turn over you know what amounts to part of our share of the profits that we derive to this um passive owner which is the estate Andor The Heirs of the estate and
13:19 so that's why you you would often see a buy sell agreement that allows the estate or The Heirs to the deeding to get the the value of of that share of the business um paid to them um and and then the two remaining owners continue on as co-owners and co-workers in the estate so part of a buy sell agreement typically and by the way for for some an LLC for example um typically in the
13:54 operating agreement for an LLC there will be essentially what amount to the terms of a buy sell agreement should one of the members die Andor sometimes it's even if that member just doesn't want to be involved in the business anymore this is the mechanism by which contr changing control of the business happens okay and and and by the way this this could also apply to a situation where you have um owners of the business who are not actively involved so let's say you've got uh an LLC with four members two of
14:33 them actively run the business and they own let's say 40% of the business a piece and then there are two other owners who own 10% each okay so there might still be a buy sell agreement um because um you know they don't want to have to deal with an investor that maybe they don't know it's it's who knows the the the children of the original invest investor or you know whoever it is they may not want want to have to deal with the erors as an investor and so the operating agreement gives them the right
15:09 to buy out um that that ownership interest um on on the death of the of that owner um and and it may also provide that if that owner for whatever reason doesn't want to remain an owner anymore he has the option of triggering the buy sell agreement and getting whatever the you know compensation is for his share back now as I started to say a moment ago there typically in the buy sell agreement will be some mechanism for valuing the business typically an appraisal um although not
15:45 always it it may be there's just a formula in the buy sell agreement based on income or or whatever and then some mechanism by which legally the transfer of the interest occurs might go through escrow or whatever but anyway those are all um parts of the Bell agreement as is the ability of the remaining members to fund it so there may also be a funding mechanisms so for example the operating agreement of an LLC May authorize the
16:22 remaining owners to borrow against the share of the business they're acquired Hing in order to buy out that share and so they're while they may not um be able to leverage uh you know borrow in the business without uh you know the um authorization of all the investors in the case of a buyout of a deceased owner they may be able to fund you know to to borrow that money to fund that buyout with only a vote of the remaining
16:59 uh owners of the business so again all of this is is negotiated it's best to set that kind of thing up at the time the business is set up right so that uh you know no one is is investing under a scenario where you know down the road it it changes or there's there's you know uncomfortableness because some people think it should be handled one way and other there's another now you have a dispute between the co-owners okay so so uh a buy sell agreement next you really want to in a
17:34 situation where you own a business but also operate a business you really want to integrate that business into your estate plan so so for example if if you as part of your estate plan set up a living trust so you may want your business owned um by um the living trust as opposed to you as an individual okay and in so doing the that ownership in the business will be
18:11 transferred through the trust as opposed to through uh having to go through probate okay now having said that this is an issue by the way all of these issues are things to talk about your lawyers with uh I'm giving you you know questions to ask things to think about but all of this takes sound legal advice and even sound accounting advice to make sure that you're making the right decisions so do you want to handle the owners uh do you want to hold I should
18:46 say the ownership of a business in your living trust yes no it may be the best way to do it but there may be other ways to do it okay now if you don't uh hold it in a living trust then you should and and you decide for whatever reason you're going to pass your your uh assets through a will so you you definitely want to be clear about how you know how that who the who the um inheritors are of that business interest okay I'm going
19:21 to talk a little B I'm going to talk more about that um in in another issue down the road so I'm going to leave that that issue for now and move on another part of integrating your business uh your business transition and estate plan into your overall estate plan is making sure that you account for estate taxes so especially in a situation where what you know you're the what you own in the business the the value of the business to your estate is
19:56 the major asset of the state so and and let's say right now the the exclusion is roughly $13 million so let's say you have a business that's worth $20 million so $7 million of that value is going to be subject to estate taxes okay now you you know you don't want to be in a situation where you have to sell the business in order to be able to pay the estate taxes and so there are various ways to look at
20:32 minimizing estate taxes or providing for estate taxes using things like a life insurance trust Etc so all of these need to be examined so that if indeed you want the business to continue after you die it's able to do so without being without that transition being negatively impacted by the need to pay estate taxes and by by the way keep in mind that at the end of next year if the um 20 I believe it's a 2017 tax bill um does not
21:08 get renewed in some way so the the estate tax exclusion is going to drop to $5 million now $5 million is is is still a large number um but you know if you have a business that's worth let's say $8 million right now and you're thinking I don't have to worry because it's less than the estate tax exclusion just keep in mind that come January 1st 2026 that exclusion could drop to five million and now an $8 million business will have um
21:46 $3 million of that value exposed to estate taxation which could be the estate tax rate is is roughly 40% you're looking at at least about a million you're looking at around a million dollars in estate taxes that's assuming you live in a state with no estate tax now and there are still several States um that have estate taxes I I think there's I want to say 14 states still have an estate tax okay so um you want to make sure that the need to pay that going forward is dealt
22:25 with in your overall estate plan so that doesn't hamper the ability of the business to keep operating okay um and and that kind of goes with the next thing which is just to make sure that you keep an eye on liquidity issues in general so let's say you have a circumstance where your business maybe has a lot of value but maybe it's some kind of Technology business and it really hasn't it hasn't started generating a cash flow yet and so it needs to have it needs to be raising
23:00 Capital to have that liquidity to pay for operating expenses research and development Etc okay so if having additional liquidity is important for the viability of the business how are you how is that going to happen if if you know on once you have passed away so what Provisions might you make again this can be handled through uh life insurance maybe there's a life insurance policy um on on the business for you as a as as what's called keyman Insurance okay and
23:36 if you die the policy pays you know x amount of dollars and that will give sufficient liquidity so there's a Runway there for for your successors to take over get familiar enough with the business that maybe you know they'll be able to raise additional Capital if that's necessary again there's lots of ways this can be handled but just keep keep in mind that if if you're dealing with a business that that has value but is not cash flowing yet which you know especially if you're in the more startup early stage of a business okay um that
24:14 could be an important consideration especially if you have Partners or or you know co- co-members right so let's go back to that example of a few minutes ago where you have three members of an LLC and they're all actively involved in the business but let's say you're the one who generally speaking has been in charge of finances maybe you're this essentially the CFO and so you have the the the duty to make sure that the funds are there for the business to keep operating if you're gone and and let's
24:49 say the other two people are essentially the one running the operations and the other one is in charge of technology and they don't really have a a a lot of experience in capital raising okay so um not only are are in your sucession planning are you're going to want to make sure that that there's someone on who can step into your role and keep up with the need of maintaining the finances of the business but that person just may need time to get up to speed and so they may there may be a need for liquidity um while while they you know
25:26 solidify their contacts in the Financial world world Etc so all of these things need to be taken into account in your estate plan in the succession plan for the business okay um next like any estate plan you want to renew um review and and update the estate plan for your business and how that interacts with your larger estate plan on a regular basis certainly anytime there's any kind of major change you want to have have
26:02 your estate plan and your business estate plan reviewed now what we I've talked about this many times on episodes of the show so I'm not going to spend a lot of time on it h today but hopefully it makes sense that estate planning is never just a one andof thing it is a somewhat of a continuing process now um I had a client asked me the other day well you know how often should uh should we have the estate plan review like every quarter every year and the answer is probably not every quarter or every year unless there are just very rapid
26:38 changes happening in your life in your business so it really comes down to if something happens in your life or business that causes you to think um I wonder if this is going to impact my estate plan minimally I would recommend that you call your advisor and say here's what's going on do I need to have my estate plan reviewed and and and and give the advisor the opportunity to essentially say yes or no okay now hopefully you have an honest advisor who's not going to say yes just to earn
27:14 a bunch of fees okay and and I I know the estate planning attorneys I deal with most of them if not all of them will not even charge for that phone call so they because they want to encourage their clients to call them when there's a question about whether a plan should be reviewed because that you know 10 minute or 15 minute conversation for the you know nine out of 10 times the answer is probably you know no we I I don't have to review it but but you know thanks for calling the
27:49 10th time where it should be reviewed right can save a tremendous amount of headaches for both the lawyer as well as um The Heirs and the administrator for that client's estate okay next you need to consider F family Dynamics now this goes back to the issues of um uh a succession plan and also a buy sell agreement so let's say you have a business that's that's owned by several family members okay but um maybe only
28:28 some of the family members are actively involved in the business and and others are not and let's say one of the family members that is not actively involved in the business dies and now his let's say his children are going to inherit that share of the business well um it is it right for for them you know these children who were not involved in building the business are you know their even their their parent was not actively involved in running the business is it fair for them
29:03 to continue to get the same kind of share that their parent did and the answer is I I I don't know these are all these are all important questions to ask and and discuss with various family members including uh potential heirs and especially within the contexts of family Dynamics so I know you know sometimes so I was I was invited to dinner the other day and U to some friends of mine and they said it's it's it's it's just going to be the three of us it's you know you're you're a member
29:39 of the family now in this case being a member of the family is a compliment because there's such lovely people but I'm sure you can all appreciate that there are situations where being told you know oh I'm gonna treat you just like a member of the family was kind of like gosh couldn't you be nicer than that right we all know family Ames that you they treat their members you know pretty pretty badly right so it's not always a good thing to be treated like a member of a family I say that only somewhat tongue and Chic um but but the Dynamics in a family can be very difficult to
30:14 negotiate and so as much as possible they should be worked out in advance as part of your business estate plan as well as your uh personal estate plan and when you're dealing with family Dynamics it can be very very useful to have a non family member to you know deal with on sort of a neutral basis perhaps deal help deal with some of the family Dynamics potential disputes Etc it can also be a good idea to have periodic
30:51 family meetings maybe um uh what's the word I'm looking for sort of cap run by this you know neutral third party to keep family members AB breast of what's going on uh so that ex expectations are properly managed Etc generally speaking the worst thing to happen is where you have a a family member who feels he's been left in the dark by the other family members and even though he may be treated exactly the way he's supposed to be treated
31:27 according to a trust or will or whatever because he's in the dark he doesn't have trust of the other family members it causes a lot of bad feelings it can it can explode into problems whe for administrating the trust Etc and so because of that you as as best you can you want to keep your you know family members um advised as to um what's what's you know what's going on and and what they can expect um for you know for the Future Okay um next so this this is
32:06 this is not dealing now with um the death of a business owner um but it's often dealt with in the context of an estate plan and and and a business estate plan and that is planning for the disability or the incapacity of someone involved in the business now if that person is a essentially silent investor so their incapacity or disability it doesn't necessarily affect the operations of the business so it it there may not be a need to to deal with the disability or
32:44 incapacity like I said of a of of a silent investor but for business owners who are actively involved in the business so the fact that they become disabled or worse in capacitated could have a materially negative impact on the business's ability to operate and so what what is the business going to do is the is is there going to be someone to take over on an interim basis if if it's if it's you know if the doctors say well the person is disabled but they're likely to
33:20 recover or the person is incapacitated for a certain period of time but they're likely to fully recover so what is what is going to be that that interim um succession is too strong a word but what's going to be that interim plan to cover the the work and the responsibilities the duties of that individual who's disabled or incapacitated right and H how will that be handled so so first of all there may need to be a durable power of attorney just like there is in a a regular estate
33:55 plan as to um who's going to make make decisions about that that business uh owner that business person who's going to make decisions about their their health care that's typically what a durable power of attorney does now typically in a for a married couple it's it's going to be the spouse if if the spouse is still alive who holds that durable power of attorney but in in the case of a business where an individual is crucial to um to the operations of the business um you know perhaps and maybe that
34:31 person doesn't have a spouse so then maybe someone in the business will hold that durable power of attorney again these are all questions that have to be examined discussed understood and worked out with your advisors the other thing is the business may need to carry disability insurance on that individual to make sure that the resources are there for that individual to to be rehabilitated and not drain the resources of the business so let's say
35:06 you have let's go back to the example I was I've been kind of using periodically where the the person is the is is the finance person for the business right and let's say something happens and they're going to be disabled for you know nine months but they are going to be able to come back well is that person going to get their salary for nine months even though they're not contributing their you know their work to the business and if so how is the business going to afford to pay that salary and also someone to handle those duties for the nine months that the
35:43 person who is disabled is going to be gone and then how is the additional cost of that person's care going to be handled maybe the person has to be in some sort of rehabilit ation facility maybe they need some sort of Home Rehabilitation that could that could very well be more costly than what their salary would pay for them to have and so having disability insurance could be important by the way in a state like California there's a state disability program but state disability insurance
36:20 may not be enough uh you know to pay for those costs um there of course is a federal disability program as well um but again these government programs may not be sufficient and so this may be an expense and and a and a a benefit if you will that the business needs to provide for its own Survival so it's not it's not just for the benefit of the person who's disabled or incapacitated but it may be that the um ability of the
36:55 business to continue is is contingent upon that insurance being there okay finally the as part of and this is Again part of the succession planning but it could be wrapped into the business's estate plan so there may be some sort of exit strategy for each of the owners of a business okay and and in so doing um perhaps you know there's a plan for um you know the the senior gener maybe let's go to the example of a family
37:31 business okay so maybe the most there's a there's a provision in the operating documents for the business for the most senior generation of the business to retire at a certain point and then sort of the Next Generation behind them steps up okay so maybe you have a business that was started by a bunch of baby boomers like me okay and and they hold the you know CFOs CEO CFO coo roles right and then their children the maybe the you know gen Gen X people they're sort of the next level down the
38:06 executive and Senior VPS or whatever and there's a provision uh for an exit strategy whereby at a certain age the senior that senior level Baby Boomers they retire okay and the Gen X people now step up into those most senior roles so how is that going to happen and what are what is that that retiring generation going to get how is that going to be paid for how does that all work out so that everybody feels like it's essentially fair you know if you know me you know I don't use that that
38:42 word too often but but it is a relevant issue in a case like this okay and again the what are the tax considerations of that uh senior generation retiring what impact might that have have on the business are their interests going to be sold to the remaining Generations if so what kind of tax liability might there be how could that affect the the sale of those interests if the the business represents the majority of their wealth okay how is that all going to work out
39:18 so that the business can keep operating um and and isn't hampered by um you know by the tax consequences of whatever this exit strategy is now one type of exit strategy is something called an ESOP it's an employee stock ownership plan and this allows the owner or owners of a business to essentially transfer ownership of the business to the employees so this is this is one type of exit strategy it's something you may look at especially if you have longtime very dedicated employees who were
39:55 essential to the success of the business it's it may very well be quite appropriate that they be rewarded by becoming the owners of the business okay now you may have children but the children were not involved at all they have their other things going on and and you know it may be by the way um a function of employee retention if you have a situation where um the children are going to inherit the ownership of the business um when when you know you die and and these long-term
40:30 um uh very loyal employees now they end up working for these you know kids that maybe they don't even know them that well they haven't been involved in the business you know that that could cause a lot of unhappiness a lot of dissatisfaction and these people may leave the business and that could cause the business essentially to collapse so it may be worthwhile considering an ESOP so that again it's a a reward for these dedicated employees so again something to talk to your uh your advisers about
41:05 is this you know an option worth considering and if so how would it be set up etc etc etc okay so real quickly I'm just going to um review the various the eight points that I made so start with a succession plan uh create a buy sell agreement integrate your business estate plan into your overall estate plan make sure you address liquidity issues review and update your plan regularly make sure you consider family Dynamics plan for disability and incapacity of someone in the business as
41:40 well as death and finally consider if you you know what kind of exit strategy you want to have that may supersede uh you know just the the the straight out death of of an owner especially an owner who's actively involved in the business so I thank you oh if you have any questions comments as always my uh social media the social media links will be in the show notes after the show posts on our YouTube channel fre feel free to post them there if you have any criticisms by all means those are always welcome um would love to address those
42:17 if there's anything of a private nature you can email me email addresses in the show notes as well um just I'm going to give my my standard caveat uh I'll respond if it's something within my area of expertise if not I will be happy to connect you with someone who has the expertise to advise you in the area of the question that you're asking so thank you uh very much for joining me today uh tomorrow my show uh business lessons from the military um we're going to be talking
42:53 about business planning on three levels okay and um you're going to see we're going to talk I'm going to talk about military Doctrine um from from a a planning standpoint and how that uh how that equates to business planning as well and then on W and that's at 10: am uh tomorrow and then on uh Wednesday um I'm G to be starting early I think because I have a um a a problem with the regular schedule
43:29 time so please uh stay tuned in um my social media for the start time Wednesday of of our show people making money okay normally that show is at 10: am um but this Wednesday it's it's going to be at a a different time and then on Thursday at 5: PM Pacific time did I say eastern time I'm sorry all the times I give you are Pacific time because I'm here on the West Coast so at 5 PM Thursday is my show jigger's place this is an opportunity as the week ends for
44:05 us to just relax a little bit and talk about all the things not associated with professional and business activities and this Thursday we're GNA have a JY Martini one of my favorite cocktails um not to toot my own horn but I'm well known for making a fantastic JY Martin and we're going to talk about the qualities that exemplify a man um this is a topic I I talk about to a lot of people and I think it's something real
44:41 really well worth um delving into I know my nephew and I have conversations on this on a pretty regular basis he's a young man and his 20s um he he's just recently got engaged so it's mleta for him and his soon to be bride and um and so I I I think this is an important question for us to to look at but it's one of those questions best dealt with um over you know I usually say bourbon but in this case uh martinis so again thanks so much for joining me wishing you a wonderful rest of the day signing
45:18 off Marie darling You Are