Taming The Planning B.E.A.S.T.

Written by James Moore

April 2, 2020

The planning beast is always lurking. Will you be its next victim?

By James L. Moore, JD, CExP

Because most entrepreneurs maintain a primary focus on running a successful business, proactive planning understandably gives way to the demands of the day. Unfortunately, the failure to proactively plan the following areas can have catastrophic consequences for you as a business owner/entrepreneur.

Buy-sell agreement. In 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 non-complete 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 could also be called exit or transition planning. Failing to establish a clear plan for the best suited individuals to succeed you for both the business and your personal wealth 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.

Make no mistake, the Planning B.E.A.S.T. needs to be tamed. The good news is that it can be, and it is less difficult to do then 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(BSA) is a powerful tool that most business owners overlook, or if they even have one it is normally deficient or outdated.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, and avoid litigation by creating certainty.

When drafting a caps BSA, it can be a stand-alone document or it can be embedded in the entity’s governing documents such as 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:

*Death            * Disability     *Voluntary transfer   *Involuntary transfer

*Retirement   *Resignation (before a specified retirement date)

*Bankruptcy  *Attainment of a stated return or economic threshold

*Divorce         *Loss of professional license         *Termination

*Dispute         *Passage of a stated period of time   *Conviction of a crime

*And anything else that fits your unique circumstances.

To be certain, it is better to address these contingencies now rather than when the event occurs and leverage on either side of the potential transaction changes dramatically.

ESTATE PLANNING WITH LIVING TRUSTS. You are married or single, young or old, apparent or not, as a business owner you need to have a proper estate plan in place. In particular, you should have a core estate plan, centered around a living trust, that includes the following documents:

Living trust. The primary dispositive document and ownership tool in your plan should be a living trust living trust is a revocable document that does all of the same things and will do is with respect to the disposition of assets and tax planning, except with one key exception – the living trust totally avoids probate. Is always wise to avoid probate to maintain your total privacy at death, prepared prevent the shares of your business from being tied up in probate court for a prolonged period of time, and minimize the expenses of administration.

Pour over will. To the extent you have failed to retitle your assets into the name of your living trust during your lifetime, then the pour over will serves to pour those meaning individual assets into the living trust for administration.

Powers of attorney. If you are unable to think for and act for and take care of yourself, you should appoint someone to be your agent in the following areas of decision-making: health care, property, and most importantly, business decisions.

While most people who engage in estate planning will leave their attorneys office with powers of attorney for healthcare and property, rarely do they leave a special power of attorney for business decisions. Since the business is likely the crown jewel of the estate and the primary cash flow generator for the family, and since the person best suited to replace you with respect to the business itself is quite likely a different person than your power of attorney for property, 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. Do not let the state get involved with end-of-life decision-making. Prepare this written directive and declaration from yourself directly to your own doctor whomever he or she may be at the time that clarifies your preference with respect to life-sustaining measures when death is imminent.

ASSET PROTECTION PLANNING-BUSINESS AND PERSONAL. First, with respect to the business, identify whether you have critical mass of risk or value, and 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 divisions or different aspects of the business, and creating protective holding companies, are all ways to minimize loss in the event of a lawsuit against the business.

Second, on a personal level, each business owner should maximize exempt assets and transfer nonexempt assets to asset protection vehicles. Exempt assets are assets in each state which are inherently protected, and can include: homestead rights, assets held in tenancy by the entirety, retirement plans, insurance, and annuities among others.

Other assets you may have and most certainly in your ownership interest in your business, and are not inherently protected. Therefore, with respect to these assets, you can protect them by transferring them to either an domestic asset protection trust or limited liability company to 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 that outlines 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 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 trust that contain 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 to preserve and manage your wealth with a business base and business discipline.

Proper personal wealth succession or transition planning is critical to convert your wealth into a long-term investment opportunity for generations to come, as opposed to a 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 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 his biggest deductions comes from benefit plans, so 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. You can also avoid current taxation altogether by taking advantage of tax favored vehicles such as permanent life insurance and annuities.

With respect to estate tax minimization, for people who have a taxable estate there are three basic options:

  1. Pay them – either with your own liquid assets, or would life insurance proceeds if your estate is illiquid which is most often the case with private business owners;
  2. 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; or;
  • Avoid them – either by diverting acquisition opportunities to the next generation during your lifetime, or by contributing taxable assets to charity at your death.

Being proactive intelligent and aggressively addressing each of the foregoing planning areas results in the creation of a comprehensive plan for you as a business owner, the ultimate weapon for you to tame your own planning beast.

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