How entrepreneurs can leave a legacy,
not a mass of problems, to their heirs
By Kara Stefan • Bankrate.com

If you're like most small-business owners, you're too buried in running the show -- or too afraid -- to face your own mortality.

But neglecting to plan for your own demise isn't just bad business, it can create bad blood. The people who depend on the continuation of the business are those closest to you -- your family.

"Some owners are so busy running their businesses that they don't plan," says Mark Blaskey, an attorney, certified public accountant and chair of the estate planning and administration group at the law firm of Cozen & O'Connor in Philadelphia. "When they die, they have no successors, no buyers for their business and there are inordinate estate taxes that must be paid. The widow and children are left with a big problem."

Finding the keys
The worst time for a small business is just after the owner or an active partner dies. Often, no one knows what to do or even where the spare keys are located. So write it down.

The LSi Resource for Family Business Management in Oakbrook Terrace, Ill., recommends writing an Emergency Management Transition letter before you need it.

It's a personal letter addressed to the owner's spouse and family that details what to do immediately after the owner's death. It sets out a road map for grief-stricken relatives who would much rather follow a written procedure than brainstorm on the fly.

The following are key elements:

• Philosophical Guide -- Emphasize the key elements that have made the business a success and that you want to continue.
• Interim Structure -- Who is responsible for what? A division of responsibility generally alleviates excess burdens or disagreements.
• Direction and Resources -- Appoint your replacement and recommend, by name, members of a temporary advisory council. Preferably, the council members will be trusted business associates with experience in your industry or crisis management.
• Benchmarks -- Cite specific indicators of your business's performance that need to be monitored, such as overhead expenses, pretax profit levels, the allotted time for receivables or the ratio of payroll to revenue.
• Document Access -- Disclose the location of key papers such as annual financial statements, your will, trust documents, insurance policies, company records and stock certificates.

It is important to define the formula for determining the value of your business. Perhaps it will be multiples of earnings or revenue, one year of revenue plus the value of some fixed assets or the business's market value. Once you've determined this formula, preferably with the aid of a professional appraiser, you may devise an estate planning strategy.

Main goals of the business
The key estate planning goals are to keep the family-owned business running successfully to provide income for the widow and family, to appoint a successor structure to take control of the business reins and to avoid, as much as possible, the impact of estate taxes.

David Watts, a partner at the law firm of O'Melveny & Myers in Los Angeles, says two of the most common planning errors of family business owners are failure to use the annual gift tax exclusion and failure to take advantage of the lifetime estate and gift tax exemption.

Each parent could give as much as $10,000 per year to each child, void of gift taxes. Any gifted amounts greater than $10,000 per year may be applied to what is currently a $650,000 lifetime exclusion. The gifts may be made to a qualified trust if the parents regard their children as too young to receive such amounts. As more assets are gifted away, the value of the estate is depleted, thus reducing the estate tax liability that will be incurred when the business owner dies.

More gifts to avoid estate taxes
There's an exception to this rule that lets you be even more generous, if you like -- if you directly pay a child's medical insurance or tuition, those gifts are allowed in addition to the $10,000 cash gift.

Furthermore, the Taxpayer Relief Act of 1997 increased the unified estate and gift tax credit to $1.3 million for some family-owned businesses where the value of the business represents more than half of its owner's estate.

If you'd like your legacy to consist of more than a huge problem, it is critical to develop a plan now. Estate and succession planning is designed to protect your family from the financial burdens that may result from your death.

When the worst happens, coping with emotional stress is tough enough -- you don't want your loved ones to suffer the misfortune of losing the family business.

Kara Stefan is a freelance writer based in Virginia
To comment on this story, please e-mail the Bankrate.com editors

-- Posted: May 20, 1999