Financial Yin and Yang: Coordinating Business And Estate Plans

If a business owner is selling the business, the estate plan will stipulate how to deploy the proceeds of the sale, whether at retirement or death. The owner may, however, intend to access the wealth of the business through capital transfers. So though the business may eventually be sold or gifted, the equity of the business interest will be largely transferred out to the owner first.

Examples include creating significant qualified and nonqualified compensation arrangements, establishing consulting or non-compete agreements, and selling through an employee stock ownership plan or ESOP. These strategies may require different estate planning approaches due to the nature of the owner's retirement income. For example, the owner may be receiving qualified plan and deferred compensation income instead of business installment payments. The nature of the payment will affect the extent and effect of applicable taxes.

Finally, if the business is family-owned and the client is focused on gifting the business, the estate plan is likely to employ discounting techniques, such as grantor retained annuity trusts, intentionally defective grantor trusts and other wealth transfer concepts. Instead of selling the business for its maximum value to a stranger, the owner may want to gift the business at the lowest defensible minimum value to a child.

Knowing the client's level of wealth and intended mode of business transfer will drive the estate planning techniques to be used.

Is there adequate liquidity?

The techniques described above are moot if there is inadequate liquidity to make the exit and estate plans feasible. What if the intended buyer of the business doesn't have sufficient capital to purchase the business in the event of a premature death? What if business cash flow is insufficient to pay the owner's desired level of retirement income?

Even with a wealthy client, liquidity may be a challenge if the source of the wealth is the business interest. Many high net worth, closely held businesses have been financially ruined following the owner's death. Transfer taxes, debt and poor cash flow can quickly destroy an otherwise viable business.

The well-designed exit plan can help avoid this outcome by creating an appropriate transfer strategy in advance. Funding the nonqualified retirement plan, the buy-sell agreement, or other exit strategy provides the needed capital for payouts. Likewise, the estate plan can use life insurance and other financing techniques to assure wealth is transferred to beneficiaries in the way the owner desires. The exit and estate plan determines the vehicle for the owner's departure, but the funding provides the fuel.

The financial yin and yang for the prosperous business owner is an exit plan coordinated with an estate plan. Divided, these plans may be ineffective; but integrated and funded, they create a whole greater than the sum of its parts.

Steve Parrish, JD, CLU, ChFC, RHU, is a national advanced solutions consultant at the Principal Financial Group, Des Moines, Iowa. He may be reached at