Law News and Tips

Addicted Beneficiaries

Fred Vilbig - Thursday, August 03, 2017

 

ADDICTED BENEFICIARIES

Fred L. Vilbig ©2017

     I try not to repeat topics in this column, but it’s been a while since I wrote about the complications from addiction, and the problem keeps raising its head. I keep seeing articles and hearing stories about the opioid crisis, and I encounter it time and again when meeting with clients. My mom was in her 70s which she told me that she still wanted a cigarette after dinner, and I had no recollection of her ever smoking. Nicotine is terribly addictive, but I understand that narcotics are even worse.

     From what I hear, people can get hooked on narcotics by using prescription painkillers while following doctors’ orders. And then there are some doctors who allegedly sell prescription painkillers to make some extra money. The US attorney general is looking into that now.

     But those “safe” drugs can be expensive. Heroin on the street is apparently pretty cheap, although you may not be comfortable with the level of quality. That is evidently not that important when someone needs a fix.A funeral director recently commented that people would be surprised to know how many deaths now are drug related.There are so many drug related deaths the County has had to rent temporary morgues to hold the bodies. Addiction is a horrible thing.

     What you don’t want is for an addict to receive a lot of money outright, but even basic trust planning may not be enough. We recently settled a dispute between a trustee and beneficiary.  I had written the trust when the client’s son was still a toddler, and now her son was approaching 22. She had died in a car wreck, and the son was the beneficiary of the trust.It was what is called a discretionary trust (the beneficiary did not have an absolute right to the trust funds), and the trustee refused to give the beneficiary any money outright. We tried to set up a plan where the trustee would directly pay the beneficiary’s landlord, health insurance provider, utilities, tuition and books, and the rehab clinic. She was willing to pay the beneficiary an allowance for food, but that was pretty small, only enough to buy basic food.

     That wasn’t enough for the beneficiary. He hired a newly minted attorney and proceeded to make the trustee’s life pretty miserable. She finally just resigned. The funny thing is that knowing what happened to her, none of the successor trustees wanted to serve. The trust is stuck in limbo until they petition the court to appoint a successor trustee. The trust has been paying a lot of legal fees, and it looks like it’s going to continue.

     When parents have children or family members with substance abuse problems, planning is critical. You don’t want to give money to the beneficiary outright. That could be like a death sentence. Instead you can provide that the trustee will only distribute trust income and principal to the beneficiary on a discretionary basis for their health, education, welfare, and support. That can put a trustee in a difficult position, so it’s probably best not to have a sibling as the trustee who will be making those decisions. I always try to keep families together, and that almost certainly will create a lot of tension in that relationship. Sometimes I’ve required beneficiaries to submit to drug testing before any distributions are made to them. Trustees can also require receipts for how previously distributed money was spent. This requires a lot of work, but it is a pretty serious situation.

     It’s sad that so many people need to deal with these issues, but it is a reality. Ignoring the problem can be deadly. Plan accordingly.

     If you would like to confidentially discuss these issues further, please feel free to contact me.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

Successor Trustee Boot Camp

Fred Vilbig - Monday, May 22, 2017

 

SUCCESSOR TRUSTEE BOOT CAMP

Fred L. Vilbig © 2017

     Maybe it’s a sign that my clients are “maturing.” I’m getting more calls now from their children. Mom and dad or both are acting a little strange; their bills are not getting paid; they have to go into the hospital or nursing home and decisions need to be made; or they have both died. Typically these calls come from the child who has been put in charge of things. Mom and dad may have written a will and/or a trust, and that child has been named as the person in charge (the “fiduciary”). And they don’t know what to do.

     The duties of a fiduciary vary widely depending upon the situation. Mom and dad may just be losing mental capacity. We can all be forgetful, but sometimes people get dangerously forgetful. Bills can become seriously delinquent. They may get lost when out driving or walking around. They may not know how to dress for the weather. Prescribed medicines may become too complicated to administer. Although everyone wants to maintain their own independence, there comes a time when that isn’t reasonable. So what do you do?

     And when mom and dad get to the end of their lives, someone may need to make difficult medical decisions. People cavalierly say, “just go on and pull the plug,” but actually doing it is another matter entirely. And then there is the funeral to handle.

     After mom and dad have died, there is an asset cleanup to do. What do you do about jointly held assets? What about insurance policies, brokerage accounts, or bank accounts with beneficiary designations? What about the IRA? What about jointly held real estate? We’ve had clients ignore these things for years, and fixing them later can be a lot of work.

     If a person only has a will and dies owning property in his or her name alone, then probate is necessary. Even when mom and dad have created a trust, assets sometimes get overlooked. Probate can be a scary idea for people, but sometimes it’s a necessary evil. One of the things that the fiduciary needs to do after mom and dad have died is to determine whether all of the assets were properly put into a trust if there was one. If any assets were held in a decedent’s name alone, then those assets are going to have to be probated. That can be overwhelming for some people.

     If mom and dad did create a trust, there are a lot of questions that come up regarding trust administration. Under the law, a trustee has to provide beneficiaries with an accounting. The trustee needs to start with a beginning balance which requires an inventory. Most people don’t have an accounting background, so this can be quite a challenge. Just preparing the inventory can be overwhelming.

     There is a lot involved when a son or daughter is named as the trustee, personal representative, or attorney-in-fact, under mom or dad’s estate planning documents. As I often tell clients, these are not normal things to deal with, although in our practice they tend to happen on an almost daily basis.

     For that reason, I am putting together a seminar to discuss what’s involved in being a fiduciary. We are calling it the “SUCCESSOR TRUSTEE BOOT CAMP” (although we’ll cover other fiduciary roles as well). The seminar will be held on JUNE 15 at 7 PM at the SCHNUCKS MARKET on Kehrs Mill at Clarkson in Ballwin. Click here to register for the free Successor Trustee Boot Camp.

This seminar should be of interest to anyone who is named in estate planning documents as a personal representative or a successor trustee. We look forward to seeing you there.

 

When Mom Dies . . . Part 2

Fred Vilbig - Tuesday, April 18, 2017

 

WHEN MOM DIES … (Part 2)

       More Things to Be Done

In another paper, I talk about some of the things that people need to take care of when a family member or close friend dies.That paper dealt with things such as notifying government agencies and financial institutions in order to avoid identity theft or fraud. Now I want to turn to some of the administrative things you may need to do.

Funerals

First I should talk about the funeral. Although I have had some people say that planning a person’s funeral can be rewarding since everyone reminisces about the decedent, it can also be stressful. If you are lucky, the decedent had pre-arranged their funeral which takes a lot of the burden off of loved ones.However, there are still a few administrative things that need to be taken care of.

If the decedent did not have a pre-arranged funeral, then you will need to choose a funeral home. Once you’re selected the funeral home, you need to (1) arrange for the body to be transported there; (2) pick out a casket (which is not fun); (3) discuss all of the arrangements with the funeral director (and it seems like there are millions of them); and (4) then figure out how to pay for all of this. This process can be a lot of work under very stressful conditions.

I have found that it isn’t until after the funeral that you really have time to grieve. It’s not until all the activity is over and everyone has left that you realize what has happened.It is important to take time to get through that period, but don’t drown in it.

The Will

When you’re ready, you need to start the work. You need to search all of the decedent’s records to see what assets they owned and to find any important papers.If you find an original will, you are required to file it with the probate court where the person died.If you only find a copy, you are not required to file the copy. The will might be in a safe or safe-deposit box, but you need to try to locate it.If a will isn’t filed within a year of a decedent’s death, then it is invalid, and any probate required would be what is called intestate.

Life Insurance

In your search, you may come across one or more life insurance policies.Sometimes our clients find very old, rather small policies.In fact, some of those particular insurance companies may no longer be around.However, paid-up outstanding insurance policies don’t just disappear.Some insurance company would have taken them over, and they will be required to pay the benefit.You just need to talk to the state Department of Insurance to track them down.Then you need to figure out who the beneficiaries are, and they need to file a claim.

Retirement Accounts

You may also come across retirement accounts such as IRAs or 401(k)s (403(b)s for employees of nonprofit corporations).You need to determine who the beneficiaries are and notify them so they can file a claim.If you don’t know who they are, you should contact the plan administrator.In any event, the beneficiaries may want to ask you questions about these accounts, but be very careful.Inherited IRAs can be kind of tricky with some tax land mines hidden below the surface.It is best to direct them to their financial planner or tax professional.Better safe than sorry.

Joint Property

Then there is the question of joint property. If property – whether it be bank accounts, real estate, brokerage accounts, individual stocks, or any other property – is owned jointly, then ownership transfers to the surviving joint owner(s).In the case of financial assets, either you or the joint owner(s) need to notify the financial institution.If the asset is real estate, then you need to file an affidavit as to death with the appropriate deed recorder’s office.

Probate

If it turns out that some or all of these assets were owned solely in the decedent’s name, and if the total value of the assets is less than $40,000, then you can administer those assets in a small estate. However, if the value of the assets is over $40,000, then you need to open a full estate.Either way, those assets are frozen until you get some sort of a court order.

Taking care of things after a person’s death is not necessarily an easy thing to do. Still, it is important for the survivors that things get done properly.Care and attention to detail is invaluable.Otherwise, problems may pop up in future years.And fixing things 10 or even 20 years from now is harder than just fixing them now.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

When Mom Dies . . .

Fred Vilbig - Tuesday, April 18, 2017

 

                                                              WHEN MOM DIES …

When mom dies – or for that matter, whenever any close family member or friend dies and you are responsible for taking care of things – you can be overwhelmed. First, you have to deal with the loss. Even when they have been sick for some time, and you knew it was coming, it’s still hard.People are immeasurably valuable, and the death of anyone is a great loss.

But after dealing with the personal and the emotional loss, unfortunately, there’s business to be done. We live in a world full of opportunists. With all of our connectivity, people on the other side of the world may try to steal a decedent’s identity for financial gain. Local people may have other purposes.In order to avoid a lot of problems when someone dies, you need to do certain things.

Government Benefits

If the decedent was receiving some kind of government benefits, the proper government agency needs to be notified.With older people, that is typically Social Security.If the decedent was receiving some kind of military benefit, then the appropriate defense agency needs to be contacted.If they were a former civil servant, then the Office of Personnel Management needs to be contacted.Also, don’t forget to notify the Department of Revenue and cancel their driver’s license.

Financial Accounts

On the financial side of things, you need to search and find all of the decedent’s records regarding credit cards, bank accounts, mortgages, investment or brokerage accounts, and pension benefits.You need to let all of the appropriate people know that the decedent has died.You need to cancel the decedent’s credit cards.If the financial accounts were owned solely by the decedent, then once you tell the financial institution of the decedent’s death, then the accounts are going to be frozen until they receive a copy of a court order appointing a personal representative.

Property Insurance

Several miscellaneous things need to be tended to as well.Although it can be problematic, you really should notify the insurance company insuring the decedent’s home.The problem with this is that most insurance companies don’t like to insure vacant property.They are usually willing to insure the property for a reasonable time for administration, but that is a limited time.They will want you to sell it or lease it as soon as possible, and if neither of those happen, then they may cancel the insurance.

Miscellaneous

You should also notify the credit reporting agencies so they can close those accounts.You should put the decedent’s name on the “Deceased Do Not Call List.”You should also notify social media companies such as Facebook, Twitter, LinkedIn, Instagram, and whatever else the decedent might have been on.

As annoying as all of this might be, tending to all of these details can save a lot of future headaches, time, and even financial loss. There are some bad people prowling around out there, and we all need to protect ourselves and our loved ones.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

The Not So Durable POA

Fred Vilbig - Wednesday, February 15, 2017

     One of my partners recently came into my office with a story.  He has a client who has lost her mental capacity.  She signed a durable power of attorney (a “POA”) several years ago naming her daughter as her attorney-in-fact (her “agent”) to take care of things when she was no longer able to do so.  The daughter had taken the POA to her mother’s bank to do some banking for her mother.  The bank refused to honor it.  They said they had a policy that they would not accept POAs over 2 years old. Absurd!

     One of my clients recently had a run-in with an insurance company over a POA.  The POA said that the named agent could do anything they needed to do with annuity contracts, “including but not limited to” several listed options.  The client needed to change the beneficiaries on the contract in order to avoid probate.  The insurance company refused.  They said that since changing the annuity beneficiaries was not one of the specifically listed activities, it was not permitted.  Again, absurd!

     Until fairly recently, POAs were not very helpful.  They were only valid as long as the person giving the power (the “principal”) was competent.  They were primarily used in business transactions when travel and communication was difficult.  However, there was always a lot of uncertainty about whether the principal was still competent when the agent was acting under the POA.

     Beginning in about the 1980s, states started adopting what are called “durable” power-of-attorney statutes.  What these statutes did was they made POAs valid even after the principal lost his or her mental capacity. What this means is that an agent can continue handling the principal's business even after the principal becomes incompetent.

     This is a huge advantage for estate planning.  If no one can handle your business affairs for you when you are incompetent, then your family will need to petition the court to have a guardian and conservator appointed to handle those necessary things.  Even if you have a trust, there are assets that are not transferred into a trust that need attention.  And the law gives the agents the power to do those things.  That's why the bank and the insurance company were in the wrong.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

Wills

Fred Vilbig - Thursday, January 19, 2017

WILLS
     
      I recently met with a young couple regarding their estate planning. All things considered (including life insurance), they had a fairly good-sized estate. The problem as with many young families was the cash flow. It was already called for - every last cent - and there was nothing left for extras. Although they knew that they needed to protect their kids in the event of their deaths, they felt that a trust was a luxury. We talked about wills.
     Although I’ve talked about wills in prior posts, I want to return to the topic. I think there are a number of families (particularly young couples with children) who know they need to do some planning, but a trust is just too much. They are comfortable with a simpler, less expensive plan, notwithstanding the benefits of a trust. Why buy a Rolls-Royce when a Honda will cover your needs. So I want to talk about two important things parents can do with a will.
      When young children are involved, one of the main questions is, “Who will get the kids?” If you leave it up to the probate court, it may be a family member (but maybe not the one you want). Or they could end up in foster care. With a will, you get to say who you want to be the guardians of your children.
      Then there’s the question of who will manage the money. The minor children can’t live in the house alone, so it will have to be sold. And most families have some life insurance. Minor children can’t open a bank account, and do you really want an 18-year-old to get control of a few hundred thousand dollars? If you don’t plan, the money may go into a conservatorship to be managed by the public administrator. He can only invest in secure investments like CDs and money market funds. These investments don’t even keep up with inflation.
     With a will, you can provide that the cash will go into a trust to be managed by someone you trust. They can make reasonable investments and use the money for the benefit of your children. It’s a better plan.
      So even if cash is short, it makes sense to do some simple planning. Otherwise, problems loom in the future.

 

But Where’s the Money?

Fred Vilbig - Thursday, August 18, 2016

I recently wrote a column in the West Newsmagazine about a new Missouri law designed to protect the elderly and disabled from financial predators. As I mentioned in the column, that law (which isn’t effective until 2017) is really designed to protect people during their lifetimes. It isn’t designed to recover assets.

The problem is that many times, families don’t discover that they’ve been hoodwinked until after mom and dad are gone, and so is the money. So the question is, what do you do then?

We’ve run into a number of cases recently where after the parents’ funeral, the kids find out that all the money is gone. Sometimes the house is even in someone else’s name. And that may not even be a relative, but some complete stranger.

The available remedies depend on when the assets are taken. If the assets are taken during the parents lifetime – deeds are changed, new names have been added to bank accounts or investment accounts, those kinds of things – then clients need to file what is called a “discovery of assets,” petition. In that kind of a lawsuit, the family can investigate what assets and accounts had belonged to mom and/or dad, who has them now, and why. The process of discovery involves questionnaires called interrogatories; subpoenas for documents and information; and deposition where you interview witnesses.

In some situations the re-titling may have been legitimate. For instance, maybe your mom or dad were perfectly competent and wanted to regard someone for everything they had done for them during their life.

However, in other situations, there may have been undue influence on the part of the perpetrator or a lack of capacity on the part of mom and/or dad in regard to the transfer or re-titling. In these situations your main witness is dead, and so gathering evidence is often circumstantial. These are not necessarily easy cases to prove, but depending upon the amount involved, the family may have no alternative. Since they can be difficult cases, clients need to be pretty certain of the facts before they commence litigation. What I mean by that is that you need to have a solid idea of the assets that are missing.

It may be that the assets were not transferred during the life of the parent(s), but only upon death, either by will or trust. If that is the case, then the clients have to bring a will contest or trust contest to have those documents set aside. These kinds of lawsuits, like a discovery of assets, action, or also difficult. You have to prove that the parent did not have testamentary capacity or that the perpetrator exercise undue influence. Since the perpetrator will certainly assert capacity and deny influencing the parent, it can come down to a “he said/she said” sort of argument.

As I said, these cases can be difficult, but they are not impossible to win. They just take a lot of time. Although clients typically want a quick result, they need to be patient as the case is built from the facts presented.

The Little Things

Fred Vilbig - Friday, June 17, 2016

The poet Robert Burns once wrote a poem entitled, “To a mouse.” No one really remembers the poem, but it contains one of the most famous lines (or at least perhaps one of the most often quoted lines) of all poetry. In the original, it reads:

“The best laid schemes o’ Mice an’ Men

Gang aft agley ….”

We know it as, “The best laid plans of mice and men, oft go astray.”

People may do their best to cover all their bases (or maybe not), but inevitably something is overlooked. A person may plan to get all of their assets into joint names, with a POD or TOD beneficiary designation, or into a trust, but they miss something. Usually it is something small, but it can’t be ignored. So what to do?

As I discuss elsewhere in this book, probate can be kind of involved. So the legislature has authorized administration of a “small estate.” Small, of course, is a relative term. Depending on the state, “small” can mean less than $40,000 as in Missouri or up to $100,000 in Illinois ($150,000 in California). Generally these are net amounts after subtracting liens, but check applicable state laws. Regardless of the amount, a qualified small estate can be administered much easier.

In Missouri (as in several other states), we in effect have 2 tiers of small estates. The first tier is sometimes referred to as a “creditor’s refusal.” (Refusal refers to the fact that the court refuses to open a full-blown probate estate by issuing letters of administration that authorize the personal representative to handle the estate.) This is for estates of less than $15,000 consisting of only personal property (no real estate) and where there is no surviving spouse or unmarried minor children. In these estates, no published notice is required (more on that in a minute). In order to process a creditor’s refusal of letters, the creditor just has to file an affidavit with the probate court. As with any claim against an estate, the affidavit must be filed within one year for the date of the person’s death or it is void.

The second tier of small estates is sometimes referred to as a “spousal refusal,” although a surviving spouse is not actually necessary. This is for all estates under $40,000 (or whatever the local maximum is) where a creditor’s refusal does not apply. Notice of the administration is required to be filed in a local newspaper for 2 consecutive week. Notice is a somewhat technical requirement that varies depending on the legal proceeding involved. For regular lawsuits, it might involve a process server. When you don’t know who the other claimants might be or where you can find them, the law allows you to publish the notice in a newspaper of general circulation in the area where the legal action was filed. The idea is that you can’t take something from somebody unless you give them a chance to state their case. Once the notice has been filed, the affidavit then has to sit at court for at least 30 days.

At the end of this process, the court will sign off on the affidavit. You can take the affidavit to the bank or investment advisor and the funds released. If you’re dealing with real estate, you can take the affidavit to the title company as proof of your right to sell.

Small estates are an efficient way to deal with the property that might have been overlooked.

The Sorrow of Incompetency

Fred Vilbig - Wednesday, June 01, 2016

My client contacted me late one night. His brother was in the hospital. He had broken his legs in multiple places, but he was lucky to be alive. Fortunately he was unsuccessful in his suicide attempt.

I hope you never have to deal with this kind of thing, but more often than we care to imagine, families have to deal with a child, a sibling, a parent (or other elderly family member), or even a spouse who has some form of mental illness. The question often comes up after some incident maybe where the police have been called in. Hopefully you have specially trained police officers in your city who are wonderful!

The immediate question after an incident is whether the family member poses a threat of harm to themselves or others. If the answer is no, then once the immediate issue has been resolved, he or she goes free. There is really nothing further you can do.

If the answer to this question is yes (and attempted suicide would qualify), then a hospital can hold the person involuntarily for up to 72 hours for evaluation. After that they are released on their own or with some family member if they’re lucky. I wonder how many of the homeless people you see on the street had no family to take them in when they were released?

If the family member agrees to be admitted to a behavioral health facility on their own, then they can stay indefinitely. This gives the medical personnel more time to evaluate the patient and develop a treatment plan. The problem is that even with a good treatment plan, the patient must comply, and so often they stop taking their medicine once they start to feel better.

So what do you do when a family member refuses treatment altogether? What about when they have stopped taking their medicine? If they are able to carry on a basically “normal” life, then therapy can be successful. But sometimes, “normal” is not in the picture.

At those times, it may be necessary to seek a guardianship and/or conservatorship. A guardianship has to do with the person: their living situation and medical treatment. A conservatorship has to do with a person’s finances: their assets and bill paying. On occasion I have had someone appointed as just a guardian, but in my experience, the probate court prefers to appoint someone as both at one time.

In order to have a guardian and/or conservator appointed, a physician has to answer several questions in a sworn statement. The crucial question with regard to a guardianship is this: Does the family member lack the capacity to meet the essential requirements of food, clothing, shelter, safety, or other care, such that serious physical injury, illness, or disease is likely to occur? In other words, does the family member have enough sense about him or her to take an umbrella when it’s raining, wear a coat when it’s cold, or buy and prepare food when they are hungry?

For the appointment of a conservator, the principal question is this: Is the family member unable to receive and evaluate information or to communicate decisions to such an extent that he or she lacks the ability to manage his or her financial resources? Can he or she handle a bank account (which may be questionable for many normal people), make deposits, and pay bills.

If a person’s condition is such that he or she can’t do these things, then the probate court may be willing to appoint a guardian and/or conservator. It’s important to note that courts are reluctant to do that, so this is not necessarily an easy matter. At that time, the family member is now referred to as a “ward.” Once a guardian is appointed, he or she controls where the ward lives and what kind of medical treatment he or she gets. When a conservator is appointed, he or she will be responsible for handling the ward’s financial resources and paying his or her bills.

One of the problems with a conservatorship is that unlike with a trust or power of attorney, a conservator is usually only allowed to “invest” in government insured bank accounts or government securities. These investments typically don’t even keep you ahead of inflation.

Then there is the question of financial support. Many people with mental illness cannot support themselves. If they are able to get a job, they may not last long because of their behavior. But many of them can’t even leave the house for work.

Fortunately, there is a government program that can provide supplemental income for the mentally ill. This is under the Supplemental Security Disability Insurance program. Payments under this program are often referred to as “SSDI”. Although it is theoretically possible for an individual to obtain these benefits on their own, it can be a complicated process, even for people who are not disabled. For the disabled, it is probably beyond their ability. An experienced attorney can help.

The current state of the law is not perfect. There seem to be a lot of people who fall through the cracks. I can’t help but think that if we as a nation made mental health a priority, our streets would have fewer homeless people, we wouldn’t need his many prisons as we have, and mass shootings would be a thing of the past.

But we don’t seem to have a national resolve to cure mental illness like we do to find a cure for cancer or heart disease. We tend to treat the symptoms and not seek a cure for the illnesses themselves. I understand that we are very concerned about protecting people’s freedom and liberty, but it just seems that we are wasting human lives. For those with family members suffering from mental illness and for those who are themselves suffering from it, this is a great tragedy often resulting in wasted lives. How sad.

Business Planning – Part Dos

Fred Vilbig - Tuesday, May 17, 2016

In the first part of this discussion on business planning, I focused on the planning that people need to do at the beginning of their business with a buy-sell agreement. Now I want to turn to the kind of planning that is more proper to estate planning at the end of one’s life.

The Big Transition

It has been estimated that over the next 30 years, an estimated $30 trillion (yes, that’s “trillion” with a “T”) will be passed from the baby-boom generation to the younger generations. For many people, that will consist of houses (some boats, and fewer airplanes), life insurance proceeds, investments, retirement assets, personal property items, and yes, their businesses.

About half of the US economy is made up of small businesses, however you define that. On just a numeric basis, the SBA estimates that 99.7% of all employees are employed by small businesses. That is a large number of small businesses. Now admittedly, a large portion of those businesses are businesses without employees, but that includes partnerships and LLCs. So there are still a lot of closely held businesses out there that could be passed down to the younger generation.

Beginning back in the 1990s, we began hearing a lot about how all of these family business owners were going to start planning to pass their businesses down to their children. Since those plans often involve life insurance, all of the life insurance agents were getting excited. The problem is I’m not seeing it.

I talk to a lot of small business owners. The first question in planning an estate with the business interest is whether any kids are in the business? If there are no kids, are there any key employees? If the client has neither, then they probably would just want to sell. If they enjoy running the business, then they may want to stay at the helm, die at the desk, and let others deal with the aftermath.

You might have a client who wants to stay involved, but also wants to travel or have more personal time. In that case, he or she may want to sell the business, but have a long term consulting contract that includes an office with the desk. These can be difficult arrangements, though. It’s hard for people to give up the reins. There can be a lot of tension between the new owner and the “consultant.” This kind of arrangement requires just the right people.

And then you might have a client who just wants out. That’s when you clearly sell. Selling a business is beyond the scope of this discussion, but it’s an option to consider. It’s the now versus later option.

But let’s say that there is a family member or a trusted employee in the mix. Then there is another analysis you need to consider.

Family Members

I recently had a client business owner come in to see me regarding his estate planning. The 800 pound gorilla in his estate planning closet was his business. That’s the way it is with most small business owners.

In reviewing their assets, they have a house. They have some investments. But their principal asset is their business. They often don’t even have a 401(k), an IRA, or any other kind of retirement asset. Their business is their retirement plan.

This client who came in has a son in the business, but his son had some unrealistic ideas about what it took to run the business. So we had to ask some very basic questions:

What if the business fails?

Can your son get a loan on his own?

Is your son willing to guarantee 100% of the loan and is the client willing to take back a subordinated part of the purchase price?

In that situation, the client had to get value out of the business. He was dependent on it for his retirement. He was not willing to just sell it to his son because he wasn’t sure that his son would make it.

He did not think his son would be able to get a loan. His son had little collateral because he spent everything.

Even if the son qualified for an SBA loan, he didn’t think his son wanted to guarantee the loan and risk everything.

In addition, an SBA loan would only cover 90% of the appraised value. The parents really needed 100% of the appraised value to make their retirement work. They could take back a subordinated note for the difference, but that was not really good enough. So the SBA loan option would not work.

In the end, the couple just decided to put the business up for sale. Their son was not happy, so they gave him some time to work out financing, but he couldn’t get it … at least not on his terms. The business ended up getting sold, and the son had to get another job.

These are the kinds of real life issues business owners face in planning their estates. It’s always a risk to sell the business to a family member. One client sold his business to a child and took back a note and security agreement. In his wife then moved to Hawaii… for a while, at least.

The child was either overwhelmed by running the business or she just didn’t put in the time (there are two versions to this story), but in any event, she started having trouble making the payments to her parents. Mom and dad moved to Florida to be closer and give some guidance. That didn’t work either. So mom and dad moved back to St. Louis, declared a default, and took the business back. Dad had to rebuild the business and sell it to a third party for a reasonable price. Needless to say, relations with her daughter were a little chilly after that.

The Other Kids

And then there is the problem of the other children. As I mentioned above, many times the family business is the main asset in the estate. Typically small business owners don’t put money away into retirement plans, so the business is the retirement plan. That can actually work since the proceeds from the sale of the business will be taxable at capital gains rates and not ordinary income rates, but that assumes that mom and dad can get their money out of the business as I discussed above.

So if we assume that the little Johnny is going to get the business, then the $1,000,000 question is “What about the other kids?” If Johnny pays cash (either out of his own pocket or from a loan), then the other kids get cash, and that may be what they want. They never trusted little Johnny that much anyway.

But what if the company is a cash cow and is on autopilot so that even Johnny can’t screw it up? Maybe the kids want a piece of the action. Does Johnny want them meddling in “his” business?

In the alternative, what if Johnny can’t pay what the business is worth or mom and dad decide to just self-finance the sale? Then the other kids don’t get cash; they get a piece of a promissory note. Hopefully it is secured by the business, but do the other children really trust their inheritance with Johnny?

As with many estate plans, there is not a one-size-fits-all solution. A lot depends on the many intangibles and variables in the family and the business itself. Do the children get along? Do they like and/or trust each other in the business setting? Is the business doing well with a bright future or is it struggling? If it is struggling, is this a temporary problem or long term? Once you answer some of these questions, you can begin to put together a real plan.

When I was young, my mother often told me, “Remember Fred: blood is thicker than money.” As a 10 year old, I had no idea what she was talking about. Now I wonder what happened in the family that had made such an impression on her. I’ll never know now.

But needless to say, she was right. As with most estate plans, I don’t think you know if it is successful until mom and dad have been dead for several years. Then you can ask, “Are the kids still celebrating holidays together?” If not and it is because of hurt feelings from the estate plan, then it wasn’t a good plan. If so, then the plan worked well … or at least as well as could be expected.

Selling your business is complicated. Plus, things happen so quickly it's one thing you should NOT put off. Contact Fred TODAY about your situation:

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