Getting Your Affairs in Order

Every once in a while, as busy executives focused on the day to day, we need to be reminded of our mortality. Recently, for me, the story of the two Darlington students who drowned on a spring break kayaking trip in Florida hit close to home. The two boys were friends and classmates of my oldest son and they were on a trip, led by his English teacher, that he had considered going on. No matter what your age, and regardless of how healthy you are, you need to have a plan in place in the event that your transition from your job is to another world. This is especially true if you are a shareholder in a private company.

If something happens to you tomorrow, who is going to take over your responsibilities in the business? Have you communicated your views on this to anyone? Exactly how much will your estate taxes be? How will they be paid? Who will purchase your shares if those you have willed them to would prefer a more liquid investment? If you have a partner who dies, who is your new partner going to be? Where are the answers to all these annoying questions written down so that your wishes can be carried out?

According to estate planning experts, most private companies are ill-prepared to deal with the loss of a significant shareholder. It is not uncommon for a business to have to be sold to pay estate taxes. Nor is it uncommon for a founder’s legacy to fall apart once he or she departs unexpectedly. And it is routine for there to be total chaos while those left behind try to figure out what to do, even if there is a plan in place, because it was not effectively communicated. All too often, business owners adopt the attitude that these concerns are not their problem; they will be singing with the angels. But that is a selfish attitude, especially when addressing these matters takes relatively little time and money.

If you are a business owner, the first step is to figure out how the company would operate in your absence. If there is more than one option, be sure that you have decided who your replacement will be. Write it down somewhere (even if in a sealed envelope) and let someone you trust know where that document is located. If you have already done this, have you updated it lately? Your view on the subject may change over time.

According to Atlanta estate planning attorney, Allen Altman of Greenberg Traurig, if you have partners, be sure there is an agreement in place that provides for the shares of the deceased party to be purchased by the remaining shareholders, not the company. Share buybacks are typically funded with insurance policies owned by the company. If your company is bonded or borrows money from the bank, there are outside parties who would have a say in whether those insurance proceeds could actually be used for their intended purpose. Altman recommends that the partners individually hold policies on each other.

The buyback agreement should stipulate a formula for how to value the stock or provide for an independent valuation to be performed. If you choose a formula, it needs to be updated periodically, as the proper multiples or valuation methodology will change over time as the company grows and as financial markets change. A company worth six times pre-tax earnings one day could be worth eight times or four times a couple years later. Business owners rarely allow the purchase price to be established by an independent valuation. In most cases, this would be the most equitable solution. But, as many private company owners are control freaks, they don’t trust anyone but themselves to establish how the price will be established.

If the deceased individual’s shares are not automatically purchased by the remaining stockholders, the surviving owners need to be certain that the individual who inherits their partner’s shares is someone they can live with as a partner. I have a client who has a 50/50 partner whom he brags will work until he is one foot from the grave because his wife is such a witch (I am paraphrasing). But when I asked him who would be the other 50 percent shareholder in the event his hard-working partner was hit by a truck, his smile suddenly dropped. Guess who?

While everyone in the tax world has his or her own prediction for what is going to happen to estate taxes, it would be wise to follow Washington’s moving tax target and continuously update your estate plan to assure that an untimely death does not force the liquidation of the company at an inopportune time. Chris Dardaman, partner in Atlanta-based Polstra & Dardaman, points out that if there is insufficient liquidity in your estate to cover the estate tax burden, there often is no other option than to sell the company. And right on the heels of the death of a key executive may not be the best time. Moreover, the market could be poor for business sales at the time.

When you are preparing an estate plan, you should always have an independent valuation performed on your company by someone familiar with how the IRS values companies. Your homemade formula for a buy/sell agreement, or your belief that you can value the business at book value in the event of a death, may be off by several orders of magnitude from the opinion of the IRS. And in this case, the IRS’s opinion does matter.

Even when business owners invest the time to prepare estate and succession plans, which their survivors greatly appreciate, they sometimes store the information somewhere that no one can find it. In writing this article, I realized that while I have documents stored in a safe in my house, no one other than me knows the combination.

Dardaman recommends that every one of his clients establish a notebook that contains all of the financial information that would be relevant to those who have to carry on after you depart. At a minimum, the notebook should contain:

  • Life insurance policies
  • Business succession plan
  • Account numbers and locations of all bank and brokerage accounts
  • Pensions/IRAs
  • Combinations to safes and locations of safe deposit keys
  • Will
  • Trusts
  • Name and phone number of estate planner, CPA and corporate lawyer

Dardaman also recommends including instructions on any matters of importance to you that are not spelled out in one of the above documents.

If you don’t want anyone to know the contents of your notebook while you are alive, give it to someone you can trust or store it in a secure location and give the key or combination to someone you trust.

​It will only take you a matter of hours, or at most a few days, to get your affairs in order. But it is the best going away present you can leave your partners and family members. After all, you want them to be toasting you after the funeral, not exasperated trying to sort out the mess you left behind.

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