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The Entrepreneur’s Legacy:
 Preparing Family Finances for a Business Owner’s Passing

By Judith Schreiber Rowland, JD, CPA
Lake Street Advisors, LLC
Senior Relationship Manager

Great wealth carries great complexity – a stark reality that is clearest at the moment financial responsibility shifts from one person to another. In the case of a spouse’s death, the obligation to steer the family fortune is often a sudden and startling change, and the combination of grief, helplessness, and confusion can be paralyzing.

The situation grows even more complicated when a husband or wife has built their fortune through business ownership – with years tied up in running a company, ensuring a seamless transition of personal finance becomes even more daunting be laid to overcome this: families must prepare for the inevitable well ahead of such a loss and trust that their team can guide them through the steps necessary to take the reins.

Trying to progress without that foundation can lead to any number of missteps. In one extreme case, a patriarch had literally hidden stacks of cash across his family’s property and declined to provide a guide to their whereabouts during his lifetime. A significant store of wealth was therefore missing from the portfolio until his death, when documents revealed a “treasure map” of sorts. While this may be a highly unusual circumstance, the resulting delays and frustrations are actually representative of more routine situations.

Women should be particularly proactive about getting the information they need before a death is at hand, as they are most often the spouse left behind. Women five years longer than men on average (81 years vs. 76 yearsI ), with about 700,000 to 1,000,000 women widowed each year in the U.S.

Adding to the challenge, many widows were born of a generation that placed less emphasis on financial acumen. Most widows are 55 years or older, and widows account for more than half of women 75 to 84, according to US census data.II

There is ongoing debate about the growing economic savvy of younger women, but there is no doubt that a gender gap still exists – and may linger well into the future. Even after a decades-long surge of women forging ever-stronger careers, between 1993 and 2006 there was a consistent decline in the number of college-educated women in the workforce with similarly educated spouses. As a result, the labor force in 2008 had 1.64 million fewer  such women than if the growth rate had maintained its previous momentum.III Going one step further, 86% of those working women consider obsolete careers and eroding earning power as risks to their financial success, and the majority of successful female executives anticipate a major career change within the next year.IV

If women retreat from the workforce, there is no predicting wether the rise in female financial acumen will decline along with it – but if this is indeed the case, the majority of wealthy business owners will remain men. That means that the next generation of women may well face the same concerns and circumstances as today’s widows of entrepreneurs.

Basic steps to taking the reins

There is no doubt that while it is a difficult subject for families to address, the ideal approach to preparing for the future is to organize as a team. Even if the husband primarily maintains the relationship with advisors and manages the financial details, both parties should have a fundamental understanding of their finances. Regular joint meetings with the family advisor should cover critical topics such as traditional investment portfolios, the estate plan, real estate holdings, business assets, insurance coverage, income and expenses, bill payment structure, and any and all debts or liabilities on the balance sheet. For the spouses of successful business owners, there are three key areas that should be considered as they plan for a death:

  1. Know the team
  2. Families should work with a trustworthy advisory team to manage wealth and lessen the learning curve that may come with sudden financial responsibility. Especially when dealing with an emotional issue, people should feel comfortable that they will receive qualified and experienced guidance from advisors who are considering the full scope of the situation.

    Spouses should view their team of advisors (wealth managers, trust and estates attorneys, insurance agents and CPAs) as an integral part of this process; ideally they will devote some time to achieving a level of comfort that allows for open discussion well ahead of a life changing event. When difficult time arise, an existing level of trust comfort will be critical to sound decision making – adding new relationships to the mix can lead to significant setbacks.

    At minimum, families should use this network of professionals to learn the basics of the portfolio and the estate plan and to get fully organized. The team can also be useful in less obvious ways. For example, they can help locate a reliable data collection agency to store passwords, prescriptions, and account information so that these details are secured in electronic vaults and accessible when necessary; they can help clarify power of attorney so that there are no surprises when faced with death or debilitating illness; and they can provide a customized checklist of items that need to be considered when a death occurs or is imminent.

  3. Protecting the family assets
  4. For entrepreneurs who have built significant wealth, asset protection should be a standard part of the estate plan. Vehicles such as irrevocable trusts may be useful to safeguard assets from potential creditors. There are many different types of irrevocable trusts and because they are not one size fits all, the right advisor can help determine which vehicles, if any, might make the most sense for the family.

    Irrevocable trusts are built as protective housing for assets; ownership is taken out of the equation as the grantor’s assets are removed from the taxable estate. The grantor therefore gains a degree of tax relief, while the assets are transferred to the trust. Some trusts offer pure asset protection while other trusts can serve as channels to gift assets to another generation or to charity.

    On the creative side of wealth management, families can also form business entities such as a family limited liability company or limited partnership to house assets. This too, is not right for everyone – but astute advisors should be equipped to consider the options as there can often be great benefits. For example, married couples who have never used any of their lifetime exemption can fund such an entity with over $10 million of assets that are immediately removed from the estate and protected from creditors. The family can then gift shares of the company to family members at a discounted rate, further increasing the value of the gift of assets received.

    Beyond the lifetime exemption, there is also an opportunity for wealthy families to capitalize on an estate tax exemption upon death. In 2012, there is a $5.12 million federal exemption per person. meaning that with the right estate plan in place, this amount of money can be passed on free from federal tax. Asset titling is critical, however, so careful attention must be paid to how assets are titled prior to a death. This may determine whether the assets end up in a certain trust or if they end up in the surviving spouse’s name. In 2012 this is less of an issue as there is a “portability loophole” whereby the estate of a deceased spouse can transfer to the surviving spouse any portion of the federal estate tax exemption that it does not use. However, with this set to expire in 2012, business owners should ensure that their assets are titled in either the individual’s name or in the name of his or her revocable trust. This is because assets are held jointly with rights of survivorship between a husband and wife will not meet the criteria for the exemption. Unfortunately, this happens more often than one would suspect and the results can be devastating.

  5. Point business assets in the right direction
  6. Business owners are often so immersed in the immediacy of running the organization that they neglect to address the implications of actually owning it. There is a personal financial obligation that accompanies such success; owners must consider the impact that their death will have on the intertwined pieces of their corporate and family lives.

    In many cases, owners prefer that their stake in the company pass on to their business partners in the event of their death. However, should they die intestate or simply not include plans for their business succession in their estate documents, the default structure often transfers that ownership to their spouse.

    Partners must be certain to step back and be sure their corporate structure is properly directed. This is often accomplished through the use of a buy/ sell agreement. This type of agreement comes into play when a business partner becomes disabled, deceased, retires or has an expressed interest in selling. The agreement requires that upon one of these conditions occurring, the business share is sold according to a pre-determined method to the company or to the remaining members of the business.

    In planning for an unexpected loss of partner, it is prudent that each partner purchase life insurance on the lives of the other partners. This will ensure that there are sufficient funds to provide the surviving partners with assets to purchase shares back from the estate. This keeps control of the company in the existing management team while ultimately providing the surviving spouse with additional means.

The time for action

When the time comes, preparation will have played a major role in providing confidence for the road ahead. Taking action will still be difficult, but widows can begin by focusing on the day-to-day and trusting their team to tend to the rest of their financial world.

As Ron Lieber, columnist for the New York Times advised, "Some financial tasks you must do within a month or two of a spouse’s death…Just about everything else can wait a little longer because you will probably not be in the clearest frame of mind… It can be hard to resist big, decisive moves, though, and a widow may desperately want to march through every important decision and get on with her life.”V

The entire process comes down to all advisors applying rigorous discipline without losing sensitivity to an emotional situation. The chemistry and trust among the team is as vital as its ability to provide the highest level of organization, investment guidance, and administrative support. As grief complicates an already overwhelming situation, this network can bring a surviving spouse comfort and confidence that will remain long after they adjust to their new life.


Endnotes

IThe World Factbook, Central Intelligence Agency,[ www.cia.gov/library/publications/the-world-factbook/geos/us.html]
II Advising the Widow- Jane Wollman Rusoff, AdvisorOne.com, February 1, 2011
III Educated women quit work as spouses earn more, Tiziana Barghini, Reuters, March 8, 2012
IV Advisors fall short of aiding women; new study, Michael Fischer, AdviserOne.com, January 25, 2012
V For recently widowed, some big financial pitfalls to avoid. Ron Lieber, The New York Times, September 2, 2011


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781.708.4445 | 413.341.1017 | Email: info@levinedisputeresolution.com

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