Close Close

Financial Planning > Trusts and Estates > Estate Planning

Integrating Business And Estate Planning

Your article was successfully shared with the contacts you provided.

Most advisors agree that since a business is typically a large portion of a business owners estate, the business plan and the estate plan must be in sync. “We find very often that the estate planning doesnt dovetail with the business succession plan,” says Herb Daroff.

He tells a story of a client, who at age 65 owned one-third of his family business and had been running it for the last 20 years. His father, at age 90, owned the other two-thirds. “The 65-year-old was working, paying income taxes and at the same time was building his fathers taxable estate,” he says.

Most will agree that better coordination of the business succession plan with the estate plan lends itself to a smoother transition of the business.

Another issue that is addressed through the coordination of these two plans is estate equalization. “You have those children who want the business and want it intact, and you have those who are not going to be in the business,” explains Timothy OConnor. “So we can use the business succession plan and the estate plan for an equitable division of property.”

But Daroff explains that there are a number of other issues that can arise when providing for this equitable distribution. Hes learned that there can be quite a difference between fair and equitable.

For example, in one situation Daroffs client owned a business worth $3 million dollars. Both of the owners sons had tried their hand at running the business–one was running it into the ground and the other turned out to be an excellent businessman. “We were hired to build up assets of equal value to the business,” he says, as they assumed one son would get the business and the other the equivalent in cash and investments.

One day, the son who was to inherit the business spoke up, “If you think those two are equal, then I should be able to choose which one I wantIll take the cash and in six months, Ill own both.”

The solution here was to recognize that the son taking the business has what Daroff calls “a risk premium.”

“We looked at the numbers and determined a value for the risk premium,” he says.

In the end, one son would take the business, worth $3 million, and the other would get something less.

“Arithmetically equal is not fair,” he explains.

–Barry Higgins

Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.