How Business Owners Undo Their Years of Hard Work

When it comes to preparing for retirement, transitioning their business and putting a succession plan in place, many small business owners simply aren’t realistic, says the article “Business Owners Dream (Wrongly) of an Easy Retirement Transition” from Plan Advisor. While it’s great that they believe in their businesses, by putting every last dollar they have into the business, thinking they will reap the rewards when it’s time to sell, they put themselves in a risky position.

Many small business owners treat their business as their nest egg. That may not be wrong, but if there is no other estate planning or retirement planning, there are a number of ways this could go wrong.

For one thing, it’s not likely that the value of the business at the time of the sale can be guaranteed. What if the value of the business is not as strong as the owner thinks it is? It’s better to have more than a few eggs in a retirement basket, including savings in retirement accounts that provide tax advantages.

The business owner can open a 401(k), SEP-IRA, SIMPLE or a pension plan. Because these types of accounts are tax deferred, the investments can grow while avoiding taxation. The best retirement plan for any small business owner depends upon how much income the business generates, how stable earnings are, how many employees there are and how generous the business owner wishes to be with the full-time employees.

This last factor matters because the law requires most tax-deferred plans to be fair to all employees. A business owner cannot open a 401(k) for themselves and exclude full-time employees. However, the appreciation of employees for having a 401(k) plan should be considered. By investing in an employee retirement plan, and perhaps a matching program, the business becomes more attractive to current and future employees.

Estate planning is a critical piece of the succession plan. A true family legacy plan needs to go beyond defining who will be in charge of the business and estate if the owner dies, and how the business and any other assets will be divided. If there is no will, the state’s laws will govern how assets are divided.

An estate planning attorney who routinely works with business owners will be able to help with the formation of a succession plan, with an eye to fulfilling the owner’s goals for themselves and their family. It should be understood that any succession plan needs to work in conjunction with the overall estate plan, so that both can achieve their respective goals.

For a succession plan to work, it needs to be put into place five to ten years in advance. If a sale of the business is at the heart of the plan, it can take five years to value the businesses’ profitability, formalize the management structure, identify a solid buyer, determine how the transition will be made, etc.

Reference: Plan Advisor (December 12, 2019) “Business Owners Dream (Wrongly) of an Easy Retirement Transition”

Share Your Estate Plan Now to Protect Your Family When You Are Gone

If one child will receive more than his siblings, even though his need is obviously greater, will that shared info create fighting between the children? And should children even have advance knowledge that they are going to receive an inheritance? These are some of the questions examined in the article “Disclosing estate plans in advance can save strife later” from The Indiana Lawyer. In most situations, advance discussions between family members are better to ensure family harmony.

Many estate planning attorneys have the “fair does not always mean equal” discussion with their clients. For some families, there is one child who is in dire need, while the others have prospered and don’t really need help. Maybe one child has special needs, or just hasn’t been as successful in life. In other cases, one child has already received substantial property from the parents, so no portion of the estate will be left to them. Regardless of the circumstances, which vary widely, having a frank discussion with all of the children is better than a series of surprises.

Research from the Federal Reserve Board shows that more than half of any given inheritance equals $50,000 or less, and more than 80% of all inheritances are less than $250,000.

With only half of what most people inherit being generally used to invest or pay down debt, most of these inheritances are spent, invested, or donated.

Regardless of the size of the inheritance, most parents expect that the beneficiaries of their estate will protect and preserve their legacy and use the money wisely. That is not always the case. If the parents want heirs to be careful with inheritances, they need to have a plan that will prepare heirs to act as stewards of their inheritances. The plan may be as simple as a series of conversations about saving and investing, or making charitable donations. It might also be complex, like meeting with the parent’s financial advisor and estate planning attorney and discussing wealth transfer and the potential to grow the wealth for another generation.

Families with larger estates often involve their children in annual gifting to get them used to the experience of receiving significant assets and learning how to manage these gifts. This has the added impact of allowing the parents to see how their children will respond to windfalls, which may guide how they distribute wealth in their estate plan. If one child is a repeat spendthrift, for instance, a trust may be a better way to pass the wealth to the child, with a trustee who can determine when they receive assets.

Families who have worked hard to leave their children with an inheritance, regardless of the size, should prepare their children by teaching them, through the parent’s actions, how their values impact their wealth, and how to manage it for themselves and future generations.

Reference: The Indiana Lawyer (October 16, 2019) “Disclosing estate plans in advance can save strife later”

Americans Still Aren’t Planning for The After Life

Think Advisor reported on a survey conducted by a financial services firm that revealed good news and bad news about Americans and estate planning. In the article “Americans, Even Advisory Clients, Have a Big Estate Planning Problem: Survey,” the firm Edward Jones found that two-thirds of those with an advisor have not discussed estate goals and legacy plans. That’s the bad news. The good news is that 77% said estate and legacy strategies are important for everyone, not just wealthy individuals.

Most people do understand how a properly prepared estate plan puts them in control of what happens to the people that matter most to them, including minor children, their spouses and partners. It also indicates that they recognize how estate planning is necessary to protect themselves. That means having documents, like Power of Attorney and Medical Health Care Power of Attorney.

However, the recognition does not follow with the necessary steps to put a plan into place. That is the part that is worrisome.

Without a will, assets could be subject to the costly and time-consuming process of probate, where the entire will becomes a public document that anyone can look at. Nosy neighbors, creditors and relatives all having access to personal and financial information, is not something anyone wants to happen. However, by failing to plan, that’s exactly what happens.

The survey of 2,007 adults showed little sense of urgency to having legacy conversations. Only about a third of millennials and Gen Xers said they’d spoken with their advisors about the future. Surprisingly, only 38% of baby boomers had done so—and they are the generation most likely to need these plans in place in the immediate future.

Where do you start? Begin with the beneficiary designations. Check all investment accounts, bank accounts, insurance policies and retirement accounts. Most, if not all, of these financial documents should have a place to name a beneficiary, and some may permit a secondary beneficiary to be named. Make sure that you name a person you want to receive these assets, and that the person named is still in your life.

The beneficiary designation is more powerful than your will. The person named in the beneficiary designation will receive the asset, no matter what your will says. If you don’t want an ex to receive life insurance policy proceeds, make sure to check the names on your life insurance beneficiary designations.

Meet with an estate planning attorney to create an estate plan. If you haven’t updated your estate plan in three or four years, it’s time for an update. It’s equally important if you should become incapacitated and you want someone else to make financial and medical decisions on your behalf, to have up to date Power of Attorney and Health Care Proxy forms.

Reference: Think Advisor (September 16, 2019) “Americans, Even Advisory Clients, Have a Big Estate Planning Problem: Survey”

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