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Planning
Today for Today's LifeStyle.
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Are you a business owner? If so, then you probably know what it’s like
to be the first one to arrive in the morning and the last one to leave in
the evening. Have your employees ever taken home paychecks while you
sacrificed your paycheck to the bottomless pit called accounts payable?
Have you ever paid your mortgage on a credit card? Over the years, you
have no doubt worked through physical, mental and financial pain that
would have caused other folks to close shop and look for a job elsewhere.
No doubt, as a business owner you have survived untold challenges. If
yours is a family business, then you may face some unique challenges to
protect and preserve your business…and your family.
Some
Numbers
It would be an understatement to say that family
businesses are the backbone of the American economy. Some 90 percent of
all businesses in this country are either family-owned or
family-controlled. They come in all shapes, sizes and colors, representing
all sectors of our economy. From agriculture, to services, to technology,
to manufacturing, family businesses generate an estimated one-half of the
U.S. Gross National Product and pay half of all wages earned in this
country. Not all family businesses are traditional small businesses
either. In fact, about one-third of all businesses included in the Fortune
500 are family businesses. But not all of the family business statistics
are rosy.
Tragic
Transitions
Family businesses do not tend to outlive their
founders. At any given moment, 40 percent of family businesses are in the
process of transferring their ownership. Unfortunately, two-thirds of all
initial transfers fail. Of the one-third that survives an initial
transfer, only one-half will survive a second transfer. Why such a dismal
success rate? The reasons are as varied and unique as the businesses and
business owners themselves. Nevertheless, many of the failed transfers can
be traced to three causes: people, taxes and cash.
People
Planning
The family
element in every family business can mean the difference between its
success or failure during the transfer process. Common triggering events
include the retirement, disability or death of the business owner. Tough
questions must be asked and answered. Otherwise, a business that took you
decades to build can be destroyed overnight. For example, who will run the
business after you? Will it be your spouse, one of your children or a
non-family member key employee? If not your spouse, will your spouse be
financially dependent on the business or financially independent of the
business? What arrangements have you made for the inheritance of your
business-inactive children? Have you in-law proofed your estate?
Thinking ahead to the second-generation transfer of your business, what
provisions have you made to encourage thrift and industry among your
grandchildren?
Tax Truths
The Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA) went into effect on January 1, 2002. This new law
provides welcome relief from federal estate taxes by increasing the estate
tax exemption and reducing the top estate tax rate until full repeal of
the federal estate tax in 2010. Unfortunately, Title V of EGTRRA declares
its own death effective January 1, 2011. At that time the federal estate
tax returns to its pre-EGTRRA form. The only thing certain about this
future tax uncertainty is the need for proper federal estate tax planning.
Why? Without proper planning, your family may have to sell your family
business just to meet the IRS cash call.
Money
Matters
Will there be enough money to fuel the survival
of your family business? Unless you coordinate your financial plan with
your Life & Estate Plan, there may not be enough cash to fund your
ultimate objectives. For instance, an appropriately funded plan could
provide financial security for your spouse, ensure that your preferred
successor takes over the business, equalize the eventual inheritance among
your children and protect their inheritance from future problems (e.g.
divorces, lawsuits and bankruptcies). Life insurance is typically used to
fund such money matters when owned in the proper amount, type and manner.
Conclusion
This has been a brief introduction to a
complex topic. Always seek qualified legal counsel when planning for the
survival of your family business.
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