Make sure your business outlasts you - estate planning

Nation's Business, Sept, 1988 by Joan C. Szabo

Make Sure Your Business Outlasts You

Chuck Goetz's business partner died in an airplane accident when the commercial printing company they had founded was just 3 years old. Though the sudden loss of a founder's participation can cause financial uncertainties for a young company, Tumbleweed Press, in Westminster, Colo., survived its tragedy because Goetz and his partner had assured the continuation of their firm by planning their estates.

The fatal accident occurred "exactly one year after my partner and I had completed our estate planning," says Goetz, who runs the company, a profitable, $2.5 million firm with 25 employees. "I realized planning was the smartest move we had made while we were in business together. Thanks to the insurance we purchased as part of our estate plan, our bank and other creditors didn't overreact and tighten up the credit lines when my partner died."

Drawing up a plan for your estate not only can provide for the continued operation of your business, but also can minimize the federal taxes that might significantly reduce the amount of your survivors' inheritance.

Few small-business people realize that the highest tax likely to be assessed on their assets is the federal estate tax. Depending on the size of the estate, the federal taxes on the holdings that one leaves at death can run from 38 percent to 55 percent of their value, and the tax often is payalbe in cash within nine months after the death.

By law, the first $600,000 of an estate is exempt from the federal estate tax. (Every taxpayer has a credit of $192,800 on his or her estate, which offsets estate or gift taxes on up to $600,000 of assets.) The exemption is the Unified Transfer Credit, or UTC.

The substantial federal taxes applicable to an estate's assets above $600,000 can be minimized, however, through estate planning. In addition, planning can assure that an estate will pass to your heirs in the manner you desire, and that includes the passing on of a business to the next generation.

"An estate plan provides sufficient liquidity to fulfill IRS demands and avoid the unpleasant task of selling a business at a discounted value for tax purposes," says Barry Gimelstob, chief executive officer of the Financial Benefits Research Group, a financial-planning firm in Roseland, N.J. Estate planning also can assure financial security for survivors.

An estate plan includes more than a will. In fact, a will may not guarantee that your plans will be carried out. "A will won't assure liquidity to take care of the various bequests you have," says C. Randolph Holladay, senior manager for Price Waterhouse's Executive Financial Services Division.

"Few assets pass by will," says Richard Hartmann, vice president of Benefit Concepts of Colorado, Inc., a denver-based insurance-planning firm for companies and individuals.

For example, homes, bank accounts, stocks and personal property that are held jointly with a spouse all pass to the surviving spouse by law, regardless of what a will says. Life-insurance proceeds, pension or profit-sharing payments and Individual Retirement Accounts pass to named beneficiaries, unless you designate your executor, estate or trust as beneficiary. That is why it is important to see that the title on property and other personal holdings conforms with your will.

An estate plan generally includes life insurance, pension benefits, property, a power of attorney, properly drawn trusts and a carefully prepared will.

Life insurance pays beneficiaries a lump sum, and policies can be structured so their proceeds are tax-free and can be used to pay estate taxes.

Also important for an estate plan is a power of attorney, a legal document that permits another person to act on your behalf if you become incapacitated.

Trusts are used in estate planning to control the distribution and management of assets. Trusts also put restrictions on trustees to ensure that the funds in the trust are managed wisely.

In planning your estate, there are several tax-saving techniques to consider. One is tax deferral through the use of the marital deduction. It lets a person leave an entire estate to the surviving spouse with no estate tax due. An estate tax is due, however, at the death of the surviving spouse.

Another technique is to make proper use of the Unified Transfer Credit. If your estate is worth $600,000 or more, experts say, your holdings should be structured so that both spouses can take advantage of the UTC. This means dividing up large, jointly owned estates to give each spouse at least $600,000 in assets in the spouse's own name. In this way, a husband and a wife, each with $600,000 in separate assets, can pass their entire $1.2 million to their children or other beneficiaries tax-free.

One method often used to take advantage of the UTC for a married couple with a large estate is to divide the estate into two shares: a marital share for the surviving spouse, and a unified credit shelter share, or "bypass" share, for the children.