The document discusses the importance of estate planning for family businesses. It notes that the business often makes up the majority of the estate's value. Without proper planning, liquidating the business to pay estate taxes could negatively impact the family's goals of passing the business to future generations. The document outlines key steps in estate planning, including paying taxes, ensuring the business remains healthy, addressing the surviving spouse's needs, equalizing assets among heirs, and planning for different ownership scenarios.

1. Are you prepared?

2. Usually, the family business is the major asset in the estate. It isn’t unusual for it to be 80% or even 90% of the estate. Mom and Dad usually own the business jointly. Mom and Dad expect to transfer it to the kids after they are gone. However, they have probably done little to no planning to ensure that their dream comes true.

5. Moving assets from one generation to another may involve substantial expenses. Estate Tax can top out as high as 45%. Who’s money would you like to use to pay those taxes? Yours or someone else's?

6. Pass the baton? Don’t pass the baton?

7. The business will need to be sold or liquidated. Is there a market for your business?

8. Paying the tax is less difficult if the business can be liquidated. The result of a sale, or liquidation, is that mortar, bricks and machinery are replaced by cash in the estate. At that time the IRS simply takes it’s statutory percentage. But is there an emotional cost to liquidation?

9. Not much emotion involved. Perhaps a little sadness on the part of the people that had built the business.

10. Millions of business owners in our country are living a dream in which their kids take over their family business. It may be the first time the baton has been passed or it may be a baton that has been passed down for several generations. Whatever the case may be, there are powerful emotions associated with the baton exchange.

11. It should be in writing It should take in to account the current owners hopes and dreams for the business Company philosophy towards customers, suppliers, employee, etc. Responsibilities of the new baton holder(s)

12. Step #1…Deal with the taxes Step #2…Keep the business healthy Step #3…Deal with the spouse Step #4…Equalization of the estate Step #5…Living scenario

13. Federal Estate Taxes MUST be paid in cash within nine months of death before a transfer can be made! Could that be a problem? What if inflation causes the assets to grow? Will today’s liquidity be sufficient for future tax increases?

14. Add up all of the assets included in your estate. That means everything over which you have control. Then, subtract any liabilities against those assets. What is left is your NET Estate. The Estate Tax Table is applied against that figure. Year Top Estate Tax Rate Exemption Amount 2008 45% $2,000,000 2009 45% $3,500,00 2010 No Estate Tax N/A 2011 55% $1,000,000

15. If the baton is being passed, the business needs to be kept intact. The Plan needs to recognize that the business is not a source of liquidity from which to pay taxes. The estate is made up of two parts; the major part is the business itself, assets beyond that are considered Residue. What items make up your estate residue? Are there any items you wish to remain in the estate?

16. What if the business is a major portion of the estate? What if the residue contains assets that are not easily liquidated such as; house, equipment, etc.? What if the residue includes quality of living items such as; vacation home, boats, animals, etc.?

17. Can produce discounted dollars that can protect residue assets, as well as business assets. Can produce income tax-free dollars.

18. Use the residue to pay the transfer costs! Estate TAXES

19. The Plan should call for periodic calculations to determine if the residue is sufficient. What is the value of the residue? How liquid is the residue?

20. Thinking about passing the baton needs to go beyond just tax planning. There are five areas critical for the business survival when passed on to the next generation: Reduce Debt Secure the Credit Line Lock in Suppliers Stabilize Markets Retain Profit Makers

21. The amount of debt carried on the books can become a major problem for the new owners. Would a program designed to lower debt before the baton is passed make sense? Does the company own any life insurance on the current owners? If so, is it payable to the company with no strings attached? Will the proceeds arrive with favorable tax treatment?

22. A stable credit line is crucial for business success. Will the credit line run out? Are there enough cash resources to support the line of credit?

23. Share The Plan with your suppliers. Let them know business will carry on as usual when a death occurs. They will rest easy knowing their business won’t be affected by lack of planning at your business.

24. What if your company acts as a supplier for other companies? It’s their market. What is the competition going to do when the word is out about an owner’s death? They will look at the situation as an opportunity. They’ll move in on your company’s market. They talk about the insecurity facing your company. They raise doubts. Let your customers know there about The Plan. Introduce them to the next generation before the baton is passed.

25. Special talent should be rewarded. Do you have programs in place for your top producers? Do you have a Deferred Compensation Plan? Do you have a key executive disability program? Do you have death benefit-only benefits? Do you have a 401k plan? Do you have an ESOP? The profit makers will want to know about the future. Let them know about The Plan and that their future is secure.

26. This can be a tough and sensitive area. The Plan must spell out the future for the surviving spouse. If it doesn’t, it could create a very sad situation. Someone has to step up and ask the hard questions; Is the spouse interested in taking over? Is the spouse prepared to take over? What effect will that have on the next generation? What will make everyone happy? What will allow the next generation to exist in harmony?

27. No matter what the relationship is between the spouse and the business, an income flow will be necessary. One option is the Salary Pipeline. This can be used if the spouse actually works for the firm and that the salary is fair and reasonable for the duties performed. Another option is the dividend option. This is not a good option for most small companies and is normally the product of poor planning. Finally, the business needs to enter into a special program with the spouse before the business owner’s death. The program would allow for a regular check to be sent to the spouse. However, such programs require planning and action before the problem even arises.

28. Are fair and equal the same thing?

29. Let’s say Mom and Dad have three kids; two boys and a girl. The boys have worked alongside their parents in the family business for as long as they have been able to work. Now let’s look at a couple of different scenarios involving the daughter. If the daughter has also been working for the family business then there really won’t be much of a change. Her salary pipeline stays the same as does her job description.

30. Now let’s look at it from a different direction. Let’s say that Sis has her own career separate from the family business and really has no interest in her family’s business. Dad has a heart attack and dies without having planned ahead for the succession of his business. Suddenly, Sis is an owner. Isn’t it normal for her to expect some income from that relationship? This is where the friction begins.

31. This is when the family has to decide if fair and equal mean the same thing. It would be equal for all children to be identical partners in the business. But is it fair to have Sis as a partner when she has never worked for the business and has no interest in doing so now? The solution: Use the residue, or better yet, life insurance to create wealth sufficient to being a smile to Sis’s face.

32. What happens if Dad’s heart attack isn’t fatal? Thankfully, Dad survived his heart attack. However, he has now decided that life is too short and he wants to hand the reigns of the business over to his sons so he can spend the rest of his days on the golf course. Because the family had a PLAN in place, they will now put into action a lifetime buy out, or business owner phase-out program.