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Entrepreneurs are busy. Often too busy for their very own good or at least the good of their legacy. You’re probably hyper-focused on your balance sheet and income statement, but what about estate planning?
Postponing estate planning might be a hidden cost for successful entrepreneurs. The solution is available regardless of how young what you are promoting or company is today.
If you’ve seen the musical “Rent,” you’re probably humming the haunting song “Season of Love,” which reminds us that there are 525,600 minutes in a yr. Every minute counts when you’re running a worthwhile business. Think of the cost of procrastination as a measure of the rising inheritance tax that may develop into a liability for your loved ones and impact your ability to leave a legacy.
To put that in perspective, let’s say the estate’s net price is $50 million and it grows by 7.2%. The additional estate tax over ten years is about $20 million. That translates to an increased liability averaging $166,667 monthly. A net price of $100 million becomes $333,334 monthly. Tick, tick, tick . . .
The hidden liability of inheritance tax
One particular concern for business owners is that estate tax might be a “hidden liability,” because it’s a liability that your loved ones pays directly in money to the IRS after you’re dead. We call it hidden because the liability has an unknown due date and amount.
If you’re the CFO or underwriter for your lender, the liability could also be hidden because it’s an estate and family planning matter, not a direct liability of the company. But if the majority of your net price is tied up in the company or other illiquid assets like real estate, it’s now not hidden when tens of millions of dollars come due. So the tick, tick, tick becomes “BOOM!”
For the owner of a private business, how he or she does this may mean the difference between the company and its successors gaining and maintaining a competitive advantage, or losing it.
For example, a business owner with a net price of $75 million today must answer the query: How can he pay $20 million in money taxes to the IRS and still compete in his segment of the industry? No business owner wants to sell his business to pay estate taxes.
The right position for a zero inheritance tax plan
On the other hand, proper planning and positioning can actually provide an opportunity to strengthen your long-term competitive position. Inheritance tax is the only “voluntary tax” you receive. You may know it as a “zero inheritance tax plan” – and compared to your competitors who may not have a strong plan, it might be a strategy for positioning what you are promoting for lasting success.
And by the way, if you are over 55, the cost of “financing” a life insurance problem is not feasible. The cost of insurance becomes prohibitively high with each passing yr, and worse, it could develop into unaffordable to you due to health issues that will affect your ability to obtain adequate insurance.
Know and avoid this worst-case scenario
If you wish extra encouragement to consider your estate tax plan now, even if you are under 55 and in perfect health, consider the impact your unexpected death could have on your estate, given the timing of its occurrence.
We know that the majority industries – and the corporations that make up an industry – go through significant business and economic cycles, typically every 4-6 years. Imagine a scenario where a business owner dies at the peak of the business cycle, organising an amount due in inheritance tax.
Because the estate is tied up in an illiquid asset (the business), it might take several months or even years to sell the business to pay the inheritance tax. Unfortunately, a downturn in the economy shortly after the death causes the value of the business to fall. Essentially, the premature death of the business owner has caused an otherwise healthy business to be put up for sale to pay the inheritance tax.
Strategically Plan Your Beneficiaries to Eliminate Inheritance Tax
In my firm, we like to say that there are only three beneficiaries when it comes to your estate: the IRS, your loved ones, and your charity. Potentially, your employees could develop into the fourth beneficiary, but again, without a plan, that’s unlikely. So “planning” for the problem becomes the simplest way to minimize or eliminate the estate tax consequences.
You can strategically allocate your estate and redirect IRS estate taxes to other beneficiaries. Instead of 60% to family and 40% to the IRS, a good plan can make it closer to 75% to family and 25% to charities or other beneficiaries.
Create a SMART plan to maintain family harmony
Have you ever heard someone complain, “My parents built a great business, but my brother ran it into the ground?” The truth was probably that the brother was unable to pay the IRS about 50% of the business value while struggling to keep the business competitive. So it’s not only the money that hurts because of poor planning; it might also result in fighting and the risk of litigation between relations. Business succession and estate planning should be done to create an efficient and harmonious transition. It’s SMART (SAve Mone ANDand Reducate T(asset transformation plan).
There is a certain urgency to this task that goes beyond the unexpected. The impending expiry of the current estate tax rules at the end of 2025 will exacerbate the burden. You have a good timeframe to work on if you begin now and spend a few hours turning your growing estate tax liability into a multi-generational asset for your loved ones and community. Start by asking your peers or advisors for their perspectives and who you may bring onto your team to make it easier to create a plan that can set you and your legacy up for success.