The Importance of Life Planning

John Buckley III, Attorney at Law  

You've spent years building your business. Something bothers you, but it's not your business. It's insuring the continuity of your business in the event of your disability or demise. Buckley Forbush, PLLC, knows that this type of business planning involves estate planning - a key element of business planning. We teach our clients how these two areas of planning intersect. That intersection could determine (one way or another) whether a client's business successfully transfers to the next generation of owners (whether it be family or outsiders, including key employees). At Buckley Forbush, we call this integration of a client's business and estate planning, Life Planning.

Why does business planning and estate planning intersect? There are two key reasons:

  1. Entity choice can determine whether or not you meet your transfer goals in business planning.
  2. How you hold your ownership is crucial to achieving your transfer objectives when planning for your business.

Entity Choice Is Crucial

By and large, a business should be an entity (partnership, corporation or limited liability company, or LLC). Generally, we recommend that Colorado business clients use an LLC. This entity provides superior asset protection because of the Colorado statute and the present position of Colorado courts. Colorado courts state that, if a business owner loses a lawsuit, the winner cannot seize control of the LLC by a court order to turn over the ownership interests of the LLC. However, every client is one case away from making new law, because the Colorado statutes allow courts to formulate remedies in these types of cases. This means a court could allow the seizure of that ownership interest, given the right facts and circumstances. 

Therefore, many of our clients choose to form LLCs in one of a handful of states that provide superior asset protection planning by carefully crafted statutory limitations of judicial remedies. Courts do not have the right to formulate a remedy, because the Legislature has defined the rights of a creditor very narrowly. These limitations do not make for a perfect defense. However, we know that if the client chooses to use a Colorado LLC, we cannot even make the argument.

Proper life planning requires an analysis of the entity you use for conducting your business.

How An Owner Holds Ownership in a Business Is Crucial to Achieving the Owner's Desires

Many life planning clients have estates comprised primarily of an illiquid business that is successful, but would be difficult to sell immediately. Therefore, the client's ownership could trigger an estate tax at death based on the full market value of the business but the client's heirs could end up losing the business because the business, cannot generate sufficient cash flow to pay the taxes.

American citizens can transfer up to $5,120,000 in assets to his or her heirs in 2012. However, in 2013 and beyond, that number is scheduled to drop to $1,000,000. If a business is worth more than $1,000,000, the careful drafting of an LLC's operating agreement can provide the basis to obtain a substantial decrease in the business value for estate planning purposes only. Of course, the IRS requires that the value be defensible, and the client's CPA, by and large, is not competent to make that valuation. Buckley Forbush fixes this problem by using a nationally recognized expert whose valuations carry great weight with the IRS.

Conclusion 

Let us, therefore, decide upon the goal and upon the way and not fail to find some experienced guide who has explored the region towards which we are advancing; for the conditions of this journey are different from those most travel. 

-- Seneca, On the Happy Life (AD 58)

The connection between business planning and estate planning is, by definition, complex for successful businesses. Estate planning is not simply a matter of Legalzoom.com, or forming an entity individually by going on line to the Secretary of State's website. By and large, this type of "planning" ignores the factors crucial to estate planning and generating business valuation discounts. Business planning insuring an owner's heirs get the business as the owner chooses is a multi-step process that cannot be mass-produced. Business owners need to consider the following:

  1. Where will my business be in five years, and then in ten years? 
  2. What entity is best for my business, given my goals above?
  3. How should I hold my business interest?
  4. Who controls the business if I am disabled, and can I define disability so I am not railroaded out of my business?
  5. What factors determine my business survives after my demise?

The purpose of this brief overview is to provide important information to business owners on the importance of Life Planning and bridging business and estate planning. This "bridge" defines your business continuity after your disability or death. Documents alone do not resolve this dilemma...only thoughtful consideration of business and estate planning resolves this dilemma.

(originally published in the March 2012 eNewsletter) 

John Buckley is a graduate of the United States Air Force Academy as well as Harvard Law School, where he concentrated on corporate litigation and international law. He is a founding member of Wealth Counsel LLC (www.wealthcounsel.com), an organization comprised of many of the best tax, business and estate planning lawyers in America. John was also a member of Business Enterprise Institute, which provides advanced education and mentorship to attorneys helping business owners exit their businesses and secure retirement through the owner's departure.

Contact John at Buckley Forbush, Attorneys & Counsellors at Lawinfo@BuckleyForbush.com.