GREAT IDEAS FOR ENTREPRENEURS FROM THE THOUGHT LEADERS AT CASEY NEILON
TOP 5 ESTATE PLANNING CONSIDERATIONS FOR ENTREPRENEURS
TO HELP YOU BUILD A PLAN THAT REALIZES YOUR DREAMS
By Leslie Kidd
Over the last several years I’ve had the privilege of working with numerous entrepreneurs on their estate plans. This tends to be a rather daunting process for two reasons. First, no one really wants to think about situations that anticipate their demise. Second, entrepreneurs often have complex financial lives and sorting through the details and making decisions requires a lot of time and energy. Sometimes it requires people to face situations they’ve been avoiding for years.
If there is one thing I’ve learned, it’s that putting things off to a future date only makes the situation more challenging later. Estate planning is a process far more than an event. If you need an estate plan, or if you need to update your old estate plan, here are my top 5 considerations to help you build a plan that realizes your dreams.
Why Should You Turn To Your CPA For This?
You might find it strange that a CPA is talking to you about estate planning. Let’s clear the air on that. I believe that entrepreneurs definitely need an estate planning attorney to be involved in this process. But it’s also a good idea to have your CPA involved too. Why?
I think there are three important reasons. First, many of the decisions you will need to make regarding what to do with your wealth and with your business will include tax considerations. Obviously, a CPA has the expertise to do that.
Second, a CPA is often the most trusted advisor that an entrepreneur turns to year after year. This relationship of trust can help you sort through a lot of things with an advisor who already knows you, your business, your family and probably a great deal about what you want out of life. This can save you time and also allow for deeply confidential conversations (especially regarding your loved ones) that you might not feel comfortable having with an estate attorney you just met.
Third, in several instances, me and my colleagues at Casey Neilon have served as a representative of a family to their other advisors. We have acted as a quarterback, if you will, to a team of advisors who work with a family. This level of advocacy can provide real peace of mind for someone who knows they won’t be around forever and relief for a family dealing with the deeply emotional loss of a loved one.
It’s far too easy for a lifetime of wealth and work to be squandered if you don’t have the proper controls in place.
Who Needs This Counsel?
Not everyone needs a full-blown estate plan. Young entrepreneurs who are building a successful business and have no heirs can probably handle this entire process with just a few simple documents. But for other people, this wouldn’t be adequate. Who needs a full-blown estate plan?
- Entrepreneurs with successful businesses, heirs (or others they care about) and a complex financial situation.
- Serial entrepreneurs with interests in multiple entities.
- Those approaching exit of their business where proceeds will be more than they’ve ever had before, which will require a plan to ensure it goes the way they want it to go.
- Those who now recognize that the plans they have in place today are not adequate to fulfill their dreams and wishes.
- Successful entrepreneurs who have not updated their estate plan in over a decade.
- Those who come from affluent, multi-generational families that have multiple trusts, assets, wills and heirs and need someone to help them unify it all so they are not subject to loss, over-taxation or theft.
Why They Need This Counsel
The challenge with estate planning is that if you don’t do it, the things that you don’t want to see happen might indeed happen. It’s far too easy for a lifetime of wealth and work to be squandered if you don’t have the proper controls in place. Most entrepreneurs work very hard for decades to build a business and a sizable amount of wealth.
Estate planning allows you to establish controls, legal structures and entities and other forms of documentation to ensure your wishes are realized for your business and your wealth. My purpose in this article is not to describe all the various vehicles and tools that allow you to do this. Instead, I want to describe what you should be thinking about before you engage in the estate planning process and spend money with an estate attorney.
The more you have clarity in your own mind about what you want to see happen, the easier it will be to explain it to an estate attorney. This should allow you to go into retirement or into the next phase of your life with much greater peace of mind that your estate is in the best possible position to be a blessing to your family. To learn more about how we do this, please read this case study from the Sidells family.
5 Estate Planning Questions For Entrepreneurs To Consider
When working with successful entrepreneurs, I find that it’s helpful to them to get clarity on these five questions:
- What is your legacy?
- If your legacy is your business, how protected is it?
- Who are you leaving your legacy to?
- What are your charitable goals?
- Who is on your trusted advisor team?
Let’s take a closer look at these.
What Is Your Legacy?
The first consideration for estate planning is to gain clarity about your legacy. A legacy is something that is possibly tangible, but often intangible, that you will leave behind to others. A legacy will outlive you. For entrepreneurs, this can often be quite a complex thing to get your arms around.
Usually, a legacy will be some mixture of a business or businesses and all that this represents, the wealth the business owner has accumulated from a lifetime of work, their family relationships, their personal reputation, the team of people they’ve worked with for many years to build up their business and their impact on charitable organizations.
I use the term “mixture” because every entrepreneur I serve is different. Let me give you some examples.
Some entrepreneurs founded their business decades ago and poured their heart and soul into it. They have a deep emotional attachment to it, in part, because it’s provided a comfortable life for their family and sent their kids and grandkids to college. They fought hard for the business to ensure it thrived and they made a lot of sacrifices along the way. The business was often at the center of their social life, including long-term relationships with employees and clients. Sometimes the business was even named after the family.
In these instances, the business and family are so closely linked that it’s hard to separate them. Long-term employees often feel like family. Usually the founder’s personal identity, sense of self-worth and greatest accomplishments (other than their family) came from the business. In this sense, the business is their legacy. Most of these types of entrepreneurs want to see the business and the business name thrive after they’re gone.
Other entrepreneurs founded a business, cashed out at some point and now hold interests in multiple businesses that they’ve backed financially. Still other entrepreneurs built multiple businesses along the way. In both of these instances, the entrepreneur may have no strong emotional attachment to the businesses. Their legacy could be much more closely tied to the wealth they’ve accumulated, their reputation and the relationships they built along the way.
Still other entrepreneurs built a business and know that it cannot outlive them or stay within their family after they’re gone. The business name will change and so will the employees. For these types of entrepreneurs, the wealth that comes from the sale of the business could become their legacy – what they pass on to heirs and charitable organizations they care about.
So when you think about your legacy, how would you describe it? What mixture of these elements feels right to you: business, wealth, family, reputation, relationships and charitable intent?
If Your Legacy Is Your Business, How Protected Is It?
The second consideration for estate planning is to protect your legacy. While estate planning is often thought of as something you do for the future, there are benefits for the here and now. This process can help substantially reduce risks you face today that you might have underestimated. For example, when an entrepreneur first comes to me for estate planning, I like to ask them – “if you died tomorrow, what would happen to your business?”
I know that is an uncomfortable question, but I think it’s a really important one to consider. If your legacy is your business, I believe you need both emergency planning and succession planning. Emergency planning is a short-term strategy for how the business should be run until the succession plan can be fully executed. Some succession plans can take months or longer to fully execute. If you don’t have an emergency plan, we should talk very soon.
A succession plan is an organized and structured roadmap for your exit of the business at a time of your choosing. Some succession plans involve a 100% transfer of equity. Some involve a transfer of leadership and management responsibilities along with a portion of equity to the new leaders. Nearly all succession plans involve legal documents.
No matter who will take over the business after your departure, whether it’s family, long-term employees or completely new ownership, the succession plan is all about stability. It’s about defining the most effective way for the business to thrive independent of you.
My point to you is simply this. If your business is your legacy and you don’t have an emergency plan, your legacy is at risk. If you don’t have a succession plan that prepares the business to run independently of you, your legacy is also at risk. What do you need to do to reduce these risks?
Who Are You Leaving Your Legacy To?
The third consideration for estate planning is who you plan to leave your legacy to and how you can be sure that your wishes are realized. Again, for entrepreneurs, my sense is that their legacy will be some mixture of their:
- Relationships outside the family, often long-term business relationships
- Charitable impact
So here are some questions to consider. If your legacy is your business, who will you leave it to? If you plan to leave it to your children, are they capable of running the business? Do they need oversight or support? Do they need certain licenses or credentials to qualify to run the business?
If your wealth is your legacy, who do you want to leave it to? What structures and limits do you need to put in place to ensure the wealth is used in ways that align with your values? If your legacy is your family, how do you intend to care for them after you’re gone? Are there family members that you are particularly concerned about? If so, what can you do to ensure they are looked after according to your wishes? Are there employees or long-term business partnerships you want to support?
If your legacy is your reputation, how will you be remembered? I find that this is often tied to charitable intent, which is where I’d like to focus now.
What Are Your Charitable Goals?
The fourth consideration for estate planning is charitable intent. Many entrepreneurs come from tough circumstances. Sometimes their childhoods were marred by the loss of a loved one or by some other situation that caused their family a lot of pain. In some instances, this lit a fire and a passion in the entrepreneur that almost singlehandedly accounts for their drive and commitment.
I find that people who have gone through hard times often want to help others who might be facing similar situations. Entrepreneurs, in particular, are often in a very good position later in life to make sizable contributions to charities that do things they believe in. But this is where I see many entrepreneurs making financial mistakes.
If a significant part of your legacy will be supporting charities that you are passionate about, my advice to you is make it count. There are all kinds of ways to do this and probably many more than you might have considered. Most entrepreneurs seem to gravitate toward gifts in the form of cash, stocks, property or other tangible items. These are fine, but they may not allow for the greatest impact to the charity or the greatest tax benefit to your estate.
I believe it’s important to get clarity about what you want your charitable contributions to do and which charitable organizations you want to support. Some entrepreneurs feel a special bond with a specific charity and will make a large, one-time contribution. Others want to support a cause, like cancer research, and setup grants that can go to multiple organizations for many years.
Once you have clarity about which charities you want to support and what kind of impact you want to make, it becomes much easier to define how to do this. While one-time gifts do help charitable organizations fulfill their mission, there are many other things you can do. For instance:
- You can ask your heirs to become involved with the charity, if they are not already involved.
- You can setup a CRT – charitable remainder trust.
- You can setup a CLAT – charitable lead annuity trust.
There are also several other options available to you, depending on your goals. If your legacy will be the impact you have on charities, what are you doing to make it count?
Who Is On Your Trusted Advisor Team?
The fifth consideration for estate planning is the development of a trusted advisor team. In my experience, it is often best if the members of the trusted advisor team do not include your family members. There are a few reasons I say this:
- During the loss of a loved one, it is in the best interests of your family to allow them to focus solely on grieving and cherished memories, not the logistics of an estate.
- When a third-party is held responsible to carry out the wishes of your estate plan, no one can claim that sibling rivalries or existing family schisms influence how the estate is handled.
- If you cannot count on your loved ones to settle disputes amicably, your estate could be drained in ways that you don’t want, particularly from professional fees from lawyers and protracted litigation.
So who should be on the trusted advisor team? I believe you want, at a minimum, your CPA and an estate attorney. If you have a large investment portfolio, it’s also a good idea to bring in a financial advisor. If your estate includes high-value tangible assets that require insurance, particularly real estate, you might also include an insurance specialist.
One of the most important considerations for your trusted advisor team is who will serve as the trustee of the estate. This is a deeply personal decision and one that requires a great deal of reflection. A trustee is the person who holds the greatest responsibility to ensure that the wishes you communicate in your estate plan are actually realized. In this way, the trustee will carry out your dreams for the future.
What To Do Next
If you do not have an estate plan or if it has not been updated in several years, I recommend that you reach out to me for a conversation. We can begin to explore your options and identify your short-term risks. We can also look at who should be on your trusted advisor team, including the selection of an estate attorney if you do not have one. Please do not put this off. My door is open to you.
Leslie Kidd – CPA, Manager
I am a CPA and Manager at Casey Neilon. In this role I meet with clients, prepare and review tax returns, respond to tax and accounting inquiries from clients, assist with bookkeeping and financial statement preparation, assist on estate and trust projects, work on financial statement audits, as well as overseeing, advising and training other staff accountants with various projects.