In October 2007, a retired school teacher, Kathleen Casey-Kirschling (who was born one second after midnight on January 1, 1946) became the first Baby Boomer to apply for Social Security Benefits. Her benefits started on January 1, 2008. Her 79 million compatriots will soon follow — at an expected rate of more than 10,000 per day.
According to a report in USA Today, roughly half of the people reaching age 62 in 2008 will choose to take early retirement. They will also choose to take about 75% of the benefits to which they would be entitled if they waited until age 66. By 2012 the remaining participants will start retiring and take their full share. Or will they?
The 2008 Annual Report of The Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (issued March 25, 2008) continued the alarm about the impact of boomers on the federal entitlement programs. The report noted that “Annual cost will begin to exceed tax income in 2017 for the combined OASDI Trust Funds, which are projected to become exhausted and thus unable to pay scheduled benefits in full on a timely basis in 2041.”
Hopefully, the next Congress will have the political will to address this looming bankruptcy. Until it becomes clear whether and how Congress will deal with the issue, estate planners and financial advisors need to encourage their clients to plan for a possible future with limited or no federal entitlement rights — taking advantage of favorable tax rules while they last.
In addition, advisors should encourage clients who are providing or expect to provide help to other family members (e.g., parents, in-laws or siblings) to consider buying long term care for those family members, including them as beneficiaries in family trusts or otherwise making sure their needs are addressed in the estate plan.
While there has been much media coverage about the problems in the entitlement programs, there are other areas which may be every bit as significant to estate and financial advisors, but which have not received nearly the same media attention. The remainder of this article will address some of those areas.
Family Business Transition
Ninety percent of all American businesses are family owned. Sixty percent of US publicly traded businesses are family controlled. And thirty-five percent of Fortune 500 companies are family controlled. Over three million US family businesses have been created in the last five years.
Despite their growth and large impact on the American economy, 65% of family-owned businesses fail to survive to the second generation and 86% fail to survive to the third generation. One reason for these higher percentages is the failure of family leaders to plan for the passage from one generation to the next. This issue is particularly acute for companies run by boomers.
A study issued on American family businesses in January 2003 by Mass Mutual Financial Group showed that 39% of family business leaders expected a change in leadership in the following five years, but 42% had not identified a successor leader and 20% had done no estate planning. This lack of planning is a disaster waiting to happen for many businesses, especially if the existing leadership should die or become incapacitated prematurely.
The passage of any business can be a highly chaotic event. It can be even more so in a family business. Emotional issues that are largely absent from non-family transfers can often destroy the transfer — and the business and family in the process. An increasing part of estate and financial planning therefore seeks to help family businesses manage the emotional, management, business, legal and tax complexities of transferring the family business from one generation to the next.
Selling the Closely Held Business
In 2001, roughly 50,000 small business owners intended to retire. In 2009, the number is expected to be 750,000, a 15-fold increase. Unfortunately for the owners who intend to sell the business, there are no more buyers than then there were in 2001.
Baby boomer business owners have often spent a lifetime plowing all of their energy into a closely held business, expecting the business to provide for their long-term retirement needs. This author has found that many entrepreneurs have from 70% to 90% of their accumulated wealth tied up in their closely held business.
According to a 2003 article by Roger Winsby, titled “Sell-Side Trends: The Business Transition Tidal Wave,” roughly a 33% of business owners expect to pass the business to family members; 33% expect to sell to outsiders; and 18% intend to sell to employees. The remaining portion will just shut their doors.
As a result of an over-supply, prices for small businesses are declining, even while sellers are being required to assume more risk in the sale through long term buy-outs, employment agreements, earn-outs and other deferred payment arrangements.
Selling to employees and family members is often an even riskier venture when the buyers lack sufficient capital to provide significant down payments. That forces the owner to receive long-term payments from buyers who may not have the requisite entrepreneurial skills and funds to keep the business alive in a competitive market.