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CEO Mistakes: No Succession Plan or Estate Plan


In this episode of our 'CEO Mistakes Series' host Jeana Goosmann, a CEO, Lawyer, Author, and Woman Business Owner dives into the consequences of not having a succession plan, estate plan or asset protection.

Listen to the podcast here:

Transcription from Law Talk with the Flock Episode

Jeana Goosmann:

Hello, I'm your host, Jeana Goosman, CEO, lawyer, author and woman business owner here to help navigate you through the law, your business and life as a leader. Today, we're going to be continuing with the CEO mistakes series. And we will be discussing the consequences of not having a succession plan, asset protection or an estate plan.

Sometimes I see that people think that they are never going to pass away. And people don't like to face these issues, so they put their head in the sand and they do nothing. But what ends up happening is if the business leader does nothing, and they have no plan, or they have a really old plan, the people around them start to get nervous, whether it be their family members, their key employees or their other business partners; and that doesn't exude confidence in the business. A great CEO will have a current plan. And they will make sure that the people around them know what the plan is, and they'll communicate it. And when they do that, it really helps those around you have continuity and feel comfortable, because they will know that their future too will be secure.

If the CEO passes away and doesn’t have a plan one thing that can occur, if the business is valued high enough, is there may be some death taxes that are due. Death taxes or estate taxes, as they're called, they are different than income taxes. There are lots of different kinds of taxes in life, as many people are aware. And frequently, folks just pay a lot of attention to your annual income tax. But that is a big mistake. Because death taxes, they can be as high as 40% of the estate.

Now there are exemptions. Currently, the exemption amount is just around $12 million for an individual, if they're married, and things are done, right, that can be doubled to 24 million. But that is set to sunset in 2026. And it's going to go down to somewhere just over $6 million. All these things have inflation adjustments in them. The exact numbers aren't necessarily what we're focusing on today. But just know that if the business is valued high enough, anything over that exemption amount, it will be taxed. And it starts around 40%. That's a huge tax!

What happens is the business value, as part of the estate for the owner, this tax gets waged, and the business needs to pay for it. Many companies aren't prepared to pay 40% of their value to the IRS. And as a result of that the company may need to sell, it may need to sell a division, it might need to sell some real estate. But one way or another, you have to pay those taxes. And those are things that can be planned for an advance and there are tools and techniques that you can work with your lawyer on to try and make sure that you're mitigating that risk down the line. One big thing a lot of business owners are keen on is to do tax planning. And that is something that you should plan for at that big event as well.

If the estate plan doesn't cover the business needs, so if there is no plan, the government has a plan for you. And it will default to the government's plan of who your next owner is going to be. And that will be tied up in the court system for quite some time. If you have no will or if you pass away with a will your family may have to go through probate. As a result, whoever your heir is going to be, maybe it's your spouse if you're married or your children. But that might not be who you want to own the business. If you had a properly done Buy Sell agreement, and you had death as being one of the triggering events, or even disability, you would be able to plan and have a much smoother transition.

It’s also great to have life insurance in place to fund that transition. It's much easier to make these plans when you're younger and healthy. A lot of times people wait too long and they're approaching retirement, or they have an illness. And now it's not as easy to get the life insurance to fund these different agreements and an agreement needs the proper financing to go with it. Or perhaps you're going to do a carry back and do some terms for your estate to be bought out over time by the successor. Those are all things that are great to talk about in advance because once the moment is upon you, it is too late to do so.

Again, if you have this key person that you're planning to transition your business to or key sellers, the business value is probably going to be higher than if your estate is floundering around trying to figure out how to handle this business interest. Another thing that can happen is if a business partner dies, and then the business is now left with their spouse. I honestly can say most business partners that I know don't really want to be in business with their business partner’s spouse, and they don't want it to be tied up in the court system and have to be dealing with that person at this really critical time. The banks that you work with won't like it, your other vendors aren't going to like it, the key employees aren't going to and all of a sudden their businesses thrown into limbo. It takes everybody's time and attention away from all the key issues that the business needs to be focused on.

So yes, it can take some time to do some advanced planning. But it's much, much less than on the back end, having a disaster with your business. Also, there can be a loss of some key knowledge and business relationships if there's not a great plan put in place. The owner often has a lot of information in their head. So, if you haven't started to make a transition plan and transfer that knowledge to other people and make introductions to other key people in the business, then all of a sudden, when that owner passes away, or is disabled and not able to perform in that CEO role, all of that knowledge is lost. Then people are left scrambling to pick up the pieces, trying to figure out what they should do and start a new. So, that information knowledge gap is a big hit to the business.

Asset protection is something that has to be done before you have a problem. If you don't do it before, there's potential litigation, or potential lawsuit, or potential big risk, it can be too late. The law doesn't let you do it after the fact. There's a whole body of law that we won't get into today, I'm not teaching a law class to you. But just know that you have much greater options when you're doing this planning before the problem arises. Some companies do it after they hit a million dollars in assets, they want to wrap it into a subsidiary like South Dakota LLC to get some of that protection. Other companies it might be a $10 million threshold, or even $100 million threshold, it really is going to depend on what your comfort level is. And that's something that's great to talk about with an attorney when you're doing this planning ahead of time.

At the Goosmann Law Firm I founded Trust Law Council many, many years ago. And we want to make sure that we're able to help them through these complex issues and make them simple, make them efficient, and have this dialogue with our clients. We have built up a team of attorneys that have this knowledge base so we can help our clients with these various things. I am passionate about this because I have seen far too many times CEOs make this mistake, business owners make this mistake, and the parade of “horribles” that happens on the back end.

Once you make a plan, it doesn't mean you set it and forget it. It's something that's needs to be looked at when there are changes. I always think it's a great idea for a business owners and CEOs to at least have an annual conversation with their legal counsel, as your business changes and facts change. These aren't things that are set in stone. And that can also be something that prevents people from wanting to make sure that they have a plan. I hear a million excuses on “I will do this plan once this is settled”, or “We're going to buy this company”, and “After we do that deal, then I'll do a plan”.

Quite frankly, your life is busy. You're a business owner or a CEO and there will always be excuses and more things to come. You're going to have change; change is just part of business and part of how you run your life. And so, to have a plan that can grow and change with you is something to be thought about. You have to start somewhere. Most of the plans can be changed, and they can continue to evolve as your risks change. I'm pretty sure if you looked back at your life 10 years ago, it was much different than it is today. At the same time, we can't have a crystal ball and look forward to exactly what's going to happen 10 years from now that’s why we do the best plans that we can for what we know today and what we do foresee will be coming down the pike in the future.

With that, thank you so much for joining me today. Have a great day everyone go make it worth it!