Keeping it all in the family

If you own a successful family business, chances are it’s your dream to pass it on to your children and grandchildren. Whether you realize that dream may depend on what type of estate planning you do. Taking the time now to implement a well thought out estate plan could make the difference between whether your business is passed to future generations or lost to the IRS.

Let’s look at three recent examples:

  • Malcolm Forbes, owner and publisher of Forbes Magazine, took the time to do estate planning prior to his death. As a result, his estate was passed intact to his son, Steve — without compromising any of the family’s business holdings.
  • Joe Robbie’s family wasn’t so lucky. Robbie was founder and owner of the Miami Dolphins and Joe Robbie Stadium. His family was forced to sell its share of the team after his death to pay estate taxes estimated at $47 million.
  • William Paley was founder and chairman of the Columbia Broadcasting System (CBS). His estate had to sell its entire block of CBS stock to pay estate taxes. Because the taxes had to be paid within nine months of the date of death, the stock was sold at a significant discount.

CBS was a marketable asset and could be sold quickly. Closely held corporate stock is much less marketable. Here were three very bright and highly successful men whose estate planning efforts brought forth very different results for their families.

The problem faced by Paley and Robbie was not unlike that of most business owners: lack of liquidity. Estate taxes can be as high as 60 percent of the value of your estate and are due, in most cases, within nine months of death.

Malcolm Forbes solved his liquidity problem. He was able to preserve his business because he implemented an estate plan specifically designed to provide liquidity at his death. He took the advice of his consultants and established and funded an irrevocable life insurance trust.

Business owners can — and should – adopt any of a variety of highly effective estate planning techniques. Annual gifting plans, discount planning and grantor and generation skipping trusts are just a few. Most aren’t exclusive of each other.

However, an irrevocable life insurance trust has a unique characteristic. If properly structured, it creates liquid wealth that is exempt from federal estate and federal income taxes.

The use of an irrevocable life insurance trust is part of nearly all large estate planning cases. One compelling reason is leverage. The return on a dollar invested in a life insurance policy per death benefit paid is hard to beat. If you die before your life expectancy, it offers an incredible return. If you live out your life expectancy, it still offers a competitive return with the added advantage that benefits are tax free.

In addition, it provides cash at death, when estate taxes are due. This can prevent a fire sale of assets.

Paying excessive estate taxes is a voluntary act. While it probably isn’t possible to eliminate estate taxes completely, it is possible to reduce them and pay them in an efficient manner.

There is a big difference between tax evasion and tax avoidance; someone once told me it was about 15 years. Judge Learned Hand probably said it best: “There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to any more than the law demands; taxes are enforced exactions, not voluntary contributions.”

If you are a successful business owner with more wealth than you need for your financial security and an estate that is still growing, begin your estate planning now. Educate yourself about the possibilities, then implement a plan. Those two steps can help keep your business all in the family.

Ruth Forsyth is a senior account manager and manager of market development with The Acacia Group. She is a certified financial planner with a master’s degree in financial planning. She co-hosts “All Things Financial” on KQV-AM every Wednesday from 7 to 8 p.m. Reach her at (412) 922-4360 or by e-mail at [email protected].