A Business Succession and Estate Planning Primer

Only one in three closely held businesses successfully pass on to the next generation. A lack of proper business succession planning is almost always the reason businesses fail after founders retire or die. Many times this is the result of the estate tax burden associated with the business at an owner's death.

And when the business owner's death is unexpected, the chances of business failure doubles "” unless a business succession plan provides for a smoother transition.

Creating a plan is often a lengthy process that involves working with family members and your professional financial advisers to develop and implement a plan to meet your objectives. In a way, successful business succession planning is akin to retirement planning.

Enlisting an attorney or other professional with sufficient training and expertise is essential. Working with company accountants, an attorney can render legal advice and draft documents. The attorney should be well versed in the areas of income tax law and estate planning.

Insurance policies are often used in implementing a succession plan. In situations where the prospects of the business die with the owner, it may be the only solution. These typically include professional service firms where the viability of the business is tied to the personal relationships of the owners to their clients. When the owner dies, is it likely the clients will make new relationships and take their business elsewhere? Then insurance becomes a likely option.

In addition to business succession plans, local financial planning experts say it's vital to consult professionals on estate planning.

You need to do estate planning to avoid dying "intestate," which means dying without having created either a will or a trust that provides instructions for passing your estate onto your heirs. In this case, a number of factors (probate, creditors, lawsuits, judgments, and death taxes) can weaken the value of your estate.

At one time, estate planning meant creating a will that would successfully navigate through probate. Changes in the laws and changing views of finance have made estate planning far more ranging. Consulting professionals becomes vital.

According to the AARP, thoughtful estate planning begins with these three key points:

"¢ Talking to family members now to decide how to handle your financial and medical affairs if you become incapable of making your own decisions. Learn about how power of attorney works.

"¢ Working with an attorney now. Draw up a will or establish a trust that will distribute your property according to your wishes after you die.

"¢ Making other important decisions now. That way, your loved ones won't be confused or burdened with financial troubles when you can no longer provide for them. Get familiar with the probate process.

This story is about you, your family, and your business. It's about how busy you are, day in and day out, plowing energy into your job, running to appointments, and carving out time for loved ones. It's about the tough time you have keeping up with financial news. And it's about the sweet vacation you plan, the big-screen TV you buy, the steak dinner night out "” all so you can destress just a little.

So how about channeling just a little more of today's energy and time into investing for tomorrow?

You know investing is important. You've heard how both Social Security and Medicare will face huge deficits right about the time you'll retire. Ever get a twinge when you realize you haven't beefed up your 401(k)? Or perhaps your business has been so focused on growing that you haven't carefully weighed retirement or business succession plans, much less personal estate planning.

When is your oldest headed to college, anyway?

The average American household today saves only about 1.5 percent of its disposable income. That compares with the 11 percent personal savings rate families had back in 1984. How in the world did people save that much 20 years ago? Answer: Saving and investing was more of a priority. You can make it a priority now, too, just like your parents did. You can't afford not to, with the average life expectancy rising each year and average tuition at a private college hovering at about $27,000.

"The best time to invest is when you have the money available. For example, don't wait until the last minute [at tax time] to contribute to an IRA," explains Carolyn A. Hamlin, a Hamilton-based investment representative for Edward Jones. When you have a bonus check in hand, steer clear of that electronics store and plop that cash into a stable mutual fund family through a tax-free Roth IRA.

The best plan is to invest regularly, Hamlin says. You set the amount monthly "” $100 or $500, whatever fits your budget "” and your investment adviser finds the right tool and product. Write that check first each month; then you'll never miss it on the next trip to Tiffany's.

For most people, sitting down with an investment expert, talking about your assets and goals, and considering the options is the smart choice, says Kevin Kloentrup, director of trust services at Bartlett & Co. downtown. And don't forget to bring your spouse.

"Our role becomes like a coach," explains Laura L. Humphrey, director of marketing at Bartlett. "You've amassed this wealth, now what do you want to do with it?"

A source of concrete investment advice is a certified financial planner (CFP). On your first visit to Haberer Registered Investment Advisor in downtown Cincinnati, expect to fill out a detailed questionnaire, then discuss your assets, risk tolerance, and goals with a financial planning expert. Marc E. Henn, a Haberer CFP, explains that the firm doesn't work on a fee-per-transaction basis, but instead charges a percentage of value of the portfolio they are managing. That starts at 1 percent of portfolio value, but declines as the portfolio grows.

This system gives clients several advantages, Henn says: You know your rep isn't recommending a front-end loaded mutual fund because it will generate a fee for him; and your rep is really on retainer to help with far more than mutual fund questions.

For example, Henn has helped clients with auto purchases, charitable giving, and even choosing a geothermal heating system for a home because it qualified the client for a lower mortgage rate.

And you thought financial planners just crunched numbers.

Haberer "” one of several dozen highly regarded financial planning firms in Greater Cincinnati "” has about $580 million in assets under management and 20 experts on staff.

At Bartlett, which has about $2.7 billion in assets under management and more than 70 professionals, expect to meet with your investment representative at least annually, or more frequently if you're a new client, says Kelley J. Downing, a senior portfolio manager. You'll also get quarterly reports on your accounts to make sure they meet your goals.

What do the local financial planning experts say to both CEOs and employees alike about retirement planning (or even saving for your children's college bills)? Invest, invest, invest, in ...

STOCKS: Historically, stocks "” basically a slice of the ownership of a company "” offer a high rate of return, about 11 percent. Compare that with intermediate-term bonds, which have had a return of about 8 percent over the past three decades, and money market funds, which have been as low as 2 percent recently. However, stocks also carry the highest risk of losses. Getting, and taking, professional advice is critical.

MUTUAL FUNDS: Mutual funds "” pools of stocks or bonds that are managed by professional investors "” are the building blocks of most retirement plans. That's because you can achieve broad diversity in their portfolio with individual stocks. And diversity is what protects you from market downturns. Investment experts like those at Bartlett will position your mutual fund portfolio for each market change. Right now, Bartlett's Downing is favoring energy-sector funds more heavily in portfolios because of market conditions.

529 PLANS: 529 plans that help you save, tax free, for your child's higher education are growing in popularity, says Hamlin of Edward Jones. And the more you plan for those inevitable college tuition bills, the more you inherently plan for your own retirement.

The 529 plans are operated by a state, but don't necessarily require your child to attend a state school. The 529s are federal-tax free when dispersed for tuition, room, and books at qualified schools, too. And they have other benefits. Among them: the donor stays in control of the account at all times; they are simple to enroll in and contribute to regularly; they are professionally managed; and everyone's eligible, while the amounts you can invest are considerable.

"The advantages are that if you believe your child is going to college, you can save all this money tax deferred and tax free," Hamlin explains. "But if that child opts out of college, you can transfer the 529 to another child."