Personal Portfolio

With smart estate planning, you can protect your business from the IRS

If you died tomorrow, would the tax man be your biggest beneficiary? For many entrepreneurs that question and its answer may be shocking. That's because those who postpone the task of estate planning may expose their families and their companies to enormous financial risks. Estate taxes, which currently can reach 55% or higher in some states, can kill even the most promising of fast-growing businesses by forcing heirs to sell prematurely to meet tax liabilities. You say you don't have the time to worry about that now? Then you may well be missing out on some of the best estate-tax-planning strategies, which often need to be set in place early to work effectively. To help focus your planning, we've worked with top experts to develop an estate-planning guide that identifies four life stages common to entrepreneurs and their companies.

Stage 1
You're unmarried, aged 25 to 30, and you've single-handedly founded a start-up that has sales but no profits yet. Do you really need to worry about estate planning?

Probably not, unless you have aged parents who depend on you. (If that's the case, a term life-insurance policy--which would be pretty cheap, given your age--should help.) If you care about how your assets would be distributed after your death, write a will. But let's be realistic: you don't really have many assets, except a fledgling company that probably can't survive without you.

Stage 2
Now aged 30 to 40, you're married and the proud parent of two children and a newly profitable company. You own a house and a business but have little else in the way of substantial assets. Is it time to start thinking about estate planning?

You bet it is. Do it by clarifying your estate-planning goals. Typically, entrepreneurs at this stage first want to protect their families in the event of their death. They also look for ways to reduce the estate-tax bite while retaining control of their companies.

Buying life insurance is critical at this stage, since you haven't earned and saved enough to protect your family's lifestyle without it. Buy as much coverage as you can afford--and certainly enough to pay off your mortgage, educate your kids, and replace five or more years of your salary. With a lawyer's assistance place the policy within an irrevocable life-insurance trust so that its proceeds will not be taxed as part of your estate. (Your personal and corporate creditors won't be able to get their hands on the money, either.) Don't forget to make a will that sets up a guardian, and perhaps trusts, for your children.

Alan Halperin, a partner in the New York City law firm Stroock & Stroock & Lavan LLP, recommends an additional step for clients who are at this stage. "Since their companies will probably have to be sold upon their premature death, I ask them to fax me a list of anyone--competitors, former colleagues, suppliers--who might be a potential purchaser. No one knows that information as well as they do. When I receive the list, I just file it away. But it's great to know that it's there in case we ever need it."

Stage 3
Still married to your spouse and your oh-so-successful company, you're 40 to 50 years old, with a growing investment portfolio. The kids will be off to college soon, and then, you hope, they'll get involved with the business.

You're now at the point when estate planning becomes much more complex but also potentially much more valuable. That's because your assets are really worth protecting.

Consider family limited partnerships, especially if you expect children to get involved in the company. "These are good ways to transfer minority stock stakes to your children at levels that will trigger little or no tax liability," explains Michael Mullaugh, an estate-settlement manager with Mellon Private Asset Management, in Pittsburgh. "If structured correctly, these limited-partnership interests will not include voting rights and can't be sold to outsiders."

Whatever you decide about the partnerships, you need to sit down at this stage and run through a laundry list of estate-planning trusts that might fit your situation. The options are mind-boggling and often confusing. Here's the bottom line, however: once you and your spouse have more than $1.2 million in assets, you're crazy if you overlook the protection that trusts can provide for you and your company. While considering trusts, work through the numbers with your estate planner to find out if life insurance is still necessary. (It probably will be, because profitable private companies can trigger huge estate-tax bills.)

Stage 4
How quickly things change! Your adult children decided not to enter the business after all. Now, at 50-plus, you and your spouse resolve to sell the business or conduct an initial public offering, so you can eventually retire in style. Does it pay to make your major estate-planning decisions before or after you sell out?

The earlier the better. "If you anticipate the kind of huge appreciation in your personal wealth that could come from an IPO or a company sale, the best thing you can do is transfer stock to your heirs before the sale, because it will be worth much less then, and that minimizes the tax liability," explains Allan Landau, a partner with Boston law firm Sherburne, Powers & Needham. "Hopefully, you'll get started at least a few years before the anticipated sale."

Here's why: Every year, you and your spouse can each make tax-free gifts worth up to $10,000 to each of your heirs. The IRS discounts the value of minority-stock stakes, so you may be able to transfer quite a bit without triggering a gift-tax bill.

But don't decide on a course of action without an estate planner's guidance. You have all kinds of strategies to consider, including something called nonstatutory options, a gift that makes sense if an IPO is likely; generation-skipping trusts (to pass stock in your private company to grandchildren); and a so-called qualified personal residence trust, if you're looking for tax-free ways to transfer your home to heirs.

Then relax. After all, you might just live forever.

Checklist: When to Change Plans

No estate plan lives forever. Revise your plan as conditions change. Here are some events that should trigger a reevaluation:

  • Family changes (such as the birth of a child or a child's turning 14, when tax status changes)
  • Divorce (whether your own, your child's, or a partner's)
  • Growth in personal assets, including company stock, to $1.2 million (that's the limit in terms of estate and gift taxes for a married couple's transfer of assets to heirs and others. For a single person, it's $600,000)
  • Company milestones (such as reaching profitability, increasing sales dramatically, or changing ownership)
  • Big plans (which might include the sale of corporate assets or the acquisition of personal ones)


Let's face it. If you're what we call a stage-three or stage-four business owner, you can't and shouldn't do much without the help of an estate planner with expertise in solving entrepreneurs' unique problems. But business owners whose companies and families are in the early stages may not need to ante up...yet...for a pricey consultation. Instead, consider investing in two self-help offerings from Nolo Press (800-992-6656):

  • WillMaker 6.0, a software and book package available for Macintosh and Windows ($29.95 from the publisher). It's probably best not to try any fancy footwork on your own, but you can easily use this package to draw up a basic will and an instruction letter for your executor, and even design very basic trusts.
  • Eight Ways to Avoid Probate: Quick and Easy Ways to Save Your Family Thousands of Dollars, by lawyer Mary Randolph ($15.95), isn't specifically targeted toward small-business owners but provides the kind of basic advice that makes sense for anyone with a relatively simple estate.

MELLON PRIVATE ASSET MANAGEMENT, Michael Mullaugh, 3815 One Mellon Bank Center, Pittsburgh, PA 15258; 412-234-4184 107

SHERBURNE, POWERS & NEEDHAM, Allan Landau, One Beacon St., Boston, MA 02108; 617-523-2700 107

STROOCK & STROOCK & LAVAN LLP, Alan Halperin, 180 Maiden Ln., New York, NY 10038-4982; 212-806-6159; 107