Professional Services
Thinking of the Unthinkable
Plan your estate transition or it will be planned without you
By Tracy Barbour
Professional Services
Thinking of the Unthinkable
Plan your estate transition or it will be planned without you
By Tracy Barbour
Debbie Ann Powell | iStock

egardless of net worth, everyone should have a plan for how they want the money, property, and other assets in their estate to be transferred after—or even before—they die. Estate planning is especially vital for business owners, whose untimely death, incapacity, or illness can threaten the legacy they intended to leave behind.

Estate planning provides business owners with the best means of continuing their legacy when they no longer can, says Laura Bruce of Alaska Permanent Capital Management (APCM). “If you don’t make a plan, one will be made for you at your death, and it will likely be different than the one you imagined for your loved ones or legacy,” she says.

All businesses will transition at the death of the owner either by the state or by their heirs. Sometimes this transition will result in a viable enterprise shuttering. In that scenario, long-time employees who could have otherwise continued the business may not have any options. A well-executed estate plan for business can provide a framework for the next owners. “If done well in coordination with a tax advisor, attorney, and financial advisor, the owner who invested so much personal capital can be rewarded financially and emotionally in seeing the transition or knowing that the plans are in place for a smooth transition,” Bruce says.

It’s an interesting time of transition for businesses in Alaska, Bruce says. Numerous firms started in the ‘80s with Alaska’s growth in oil and gas. Accordingly, many of those business owners are now at the age where they might want or need to transfer those entities to the next generation. Those business owners were often so busy growing the business and creating wealth that they didn’t have the time or energy to do the detailed planning needed for successful succession and distribution of the business’ equity and other assets. “The key is to make the time to make a plan and recognize that plans can be changed and amended if needed,” she says. “Alaska has excellent estate planners with creative solutions available to business owners.”

Indeed, Alaska—which is known for its favorable asset protection laws—has a variety of professional resources that can assist business owners with estate planning. APCM, for example, helps clients facilitate different facets of the estate planning and eventual settlement process by assisting with the selection and coordination of the client’s advisory team, typically consisting of a tax advisor, attorney, and investment expert. Likewise, Wells Fargo has a wealth planning and business transition planning group that partners with lawyers, accountants, and other professionals who can help guide the decision-making process. Peak Trust Company administers or manages estate plans after they have been finalized, picking up where a company like Wells Fargo leaves off. And the law firm of Foley, Foley & Pearson works with clients in various areas of estate planning, estate administration, and business succession planning.

“If you don’t make a plan, one will be made for you at your death, and it will likely be different than the one you imagined for your loved ones or legacy.”
Laura Bruce
Alaska Permanent Capital Management
A Blueprint for Businesses

Most people view an estate plan as a tool that isn’t activated until after they die. But nothing could be further from the truth, says Bob Petix, a Wyoming-based senior wealth planning strategist for Wells Fargo who works closely with clients in Alaska. In fact, the best results can be achieved with planning if people consider making transfers or other kinds of asset arrangements before their death. Very often they can transfer ownership and not transfer control. Or they can transfer control and still maintain ownership.

A proper estate plan can provide a blueprint for businesses if something unexpected happens to the owner(s). It can also help people carefully think through the ownership and control of the business now as well as once they’re no longer around. An estate plan is designed to help business owners achieve their critical goals while accounting for a variety of additional factors, including taxes. “The art of estate planning and transition planning is to balance those two interests: to take into account the client’s goals and to balance tax efficiency,” Petix says.

“The art of estate planning and transition planning is to balance those two interests: to take into account the client’s goals and to balance tax efficiency.”
Bob Petix, Senior Wealth Planner, Wells Fargo

Estate planning is equally important for small businesses, which are typically owned or managed by one or two people. An unexpected illness, incapacity, or death of a key manager or employee can fundamentally alter the course of the business, says William Pearson, managing shareholder of Anchorage-based Foley, Foley & Pearson. Take, for instance, a limited liability company with one member or owner. “If something happens to that member, the question is: Who assumes the continuity and management of the company?” Pearson says. “At a minimum, the manager should have a power of attorney in place to allow their agent the ability to operate the entity.”

In the event an owner dies without proper planning, the recourse is a probate proceeding. And this can be timely, expensive, and ultimately leave the business without a strong succession plan. Worse, without an updated will or a trust-based estate plan, there can be a delay or confusion in administration. “In business, a delay impacts the bottom line,” Pearson says. “None of us can do anything about the possibility of death or disability; the key is to recognize that good and updated planning can help to mitigate the delay and uncertainty. I would say that the first takeaway for a business owner is to have your affairs in order, to plan, and to be prepared.”

The next question is: In the event of incapacity or death, who is put in charge to run the business? The most common options are a spouse, a child, and/or a business partner. Sometimes a client will name an independent third party such as a trusted advisor or a trust company. “This choice will have substantial ramifications to your business and its ongoing success,” Pearson says. “The second key take away is naming the person that will be best suited to assume the role of management and to do it efficiently. Finally, make sure they are prepared to run the business.”

Steps to Estate Planning

Navigating the intricacies of estate planning will vary from individual to individual. But in general, financial experts advise people to start with an introspective process. The first step for business owners is to conceptualize what they want to have happen, says Matt Blattmachr, president and CEO of Peak Trust Company. Then they will need to work with an advisor or legal counsel to draft the necessary documents, whether it’s ownership agreements for the business or wills and trusts for the business owner. Essentially, they will need to ensure the appropriate people are in place to carry out the estate and business succession plans they thought of during the conceptual phase. “When they’re organizing this and thinking it through, they should make sure they answer the questions of ownership, management, and control,” Blattmachr says.

Similarly, Bruce says, the conversation about estate planning needs to start with the owner’s vision for the future. Planning can be initialized with any professional advisor, who will then bring in the rest of the team. When APCM sits down with business owners, it helps to visualize how the planning will impact clients. They explore longevity and lifestyle issues as well as legacy ideas. “For example, we might need to help them with liquidity from the business to fund their vision of retirement,” Bruce explains. “We then assist the client in finding experts who can help with other aspects of the plan, such as the valuation of the company, marketing the company, drawing up documents for the proper transition, or whatever is necessary to realize their vision for the future.”

With Wells Fargo, the initial step with planning involves pinpointing the client’s specific estate planning goals. In his role as an advisor, Petix often educates clients about different estate planning techniques that might result from an analysis of their goals. Then they determine which strategies would be employed in a given situation. This requires working with other colleagues at Wells Fargo or an outside professional partner such as an attorney, who can provide documents that reflect the decisions that have been made.

Having well-drafted documents tailored to the situation is extremely beneficial to the client, Petix says. Once the documents are signed and finalized, then assets must be retitled to ensure they work with the new documents. Very often, an asset that is owned by an individual in his or her own name can be subject to probate at death, and provisions for this issue should be made on the front end. Petix explains: “For example, if you have an Alaskan who owns a house in his name in Arizona and he dies, he would have to go through ancillary probate in Arizona. If you transfer the title of that property into a trust that is owned in Alaska, you do not have to go through that ancillary probate process. That simple act will mean that you’ve now avoided an out-of-state proceeding at death.”

Foley, Foley & Pearson is systematic in how it goes about helping clients with planning. It offers an estate planning workshop twice a month to give prospective clients a general overview of the estate planning process. Then new clients attend an intake appointment with a paralegal, who collects their asset information and schedules a “design” appointment with an attorney.

During the design appointment, many clients bring their business records, such as corporate by-laws or limited liability company (LLC) operating agreement, so the paralegal can compile the information, including a summary of their assets. “That way, before I meet with the client for the first time, I am able to review the file and have a much better picture of their estate planning needs,” Pearson says. “We have found this process to be extremely efficient because when the client sits down with the attorney, we can hit the ground running instead of spending what is potentially a lot of superfluous, billable time on information gathering.”

“None of us can do anything about the possibility of death or disability; the key is to recognize that good and updated planning can help to mitigate the delay and uncertainty. I would say that the first takeaway for a business owner is to have your affairs in order, to plan, and to be prepared.”
William Pearson
Managing Shareholder, Foley, Foley & Pearson
Business Succession/Transition Planning

Estate planning is a critical component of any business succession plan, particularly for a closely-held entity such as an S-corporation or LLC. In Alaska, business succession planning is particularly relevant. “In a young state like Alaska, we have many first- or second-generation family businesses that need to address succession planning,” Pearson says.

There are three main steps to developing a successful business transition plan, according to Pearson. The first step is to identify who the business owner’s successor will be, whether it’s an employee, partner, family member, or third-party buyer. Business owners should have an honest conversation with their spouse and children about potential future successors. “While the business may be your dream and passion, it may not be theirs,” he says. “Do they have the talent, capacity, energy, and desire to run the business if something happens to you? If the answer is yes, think about a transfer to your family. If the answer is no, look to your partners or key employees, or look for a potential buyer. If you are not able to identify a potential buyer, who can? Usually this is a business broker. However you go about it the goal is to capture the value of the business.”

“In a young state like Alaska, we have many first- or second-generation family businesses that need to address succession planning.”
William Pearson, Managing Shareholder
Foley, Foley & Pearson

Once a successor has been identified, the second step is to determine the nature of the transaction and how it will take place. There are manifold possible options, and this is where the input of counsel and the accountant is critical. “One of the largest hurdles when working through these transactions is establishing value,” Pearson says. “Once value has been determined, the focus can shift to the nature of the transaction. Will it be a sale transaction or some combination of a sale and gifting or a gift? If it is a sale to a third-party buyer, that involves a purchase and sale agreement. If there is a buy-sell agreement, you must identify the time horizon and trigger events.”

One of the biggest challenges people have is finding a way to monetize the business so that it’s a product someone wants to purchase instead of just a job, Pearson says. This can take years of planning but is well worth the effort. He explains: “I have been told that if you can walk away from your business for three months and it still makes money, you have created something of value that you can sell. I understand that for most business owners that is easier said than done, but that is key to establishing a real value for the entity.”

For Blattmachr, the development of a successful ownership transition plan starts with good documentation at the company level. Then the plan needs to be shared with whomever the successor(s) will be so that their apprenticeship can begin early. “If you know today that person A is going to take over, then put that plan in place,” he says. “This is especially important the more you’ve got an owner-operator who’s made that business successful. Alaskans in general are pretty good about planning. However, they may not be good about talking about the plan that’s in place—until it’s implemented.”

During the business succession planning process, three categories should be clearly defined: ownership, control, and management. And these elements can be vastly different. “The owner needs to define how that will flow,” Blattmachr says. “Sometimes it’s all the same, but many times it’s not.”

From Bruce’s perspective, devising a successful business succession plan should begin with determining the vision for the company’s future—if the owner weren’t there—and determining today’s needs. She suggests creating a financial plan that considers cash flow, inflation, and sequencing of return risk. Then the owner should gather a team of professional advisors for design and implementation. This can include tax advisors/CPAs that are experienced in business valuation and transition; attorneys to advise on the legal issues and draft the transition documents; and possibly insurance agents to help fund the insurable aspects of the transition. She emphasizes: “Make sure you complete your plan and put the proper documents in place, even if the likelihood of future changes is high. Recognize that no plan is perfect, but having a plan is better than no plan at all.”

The approach to creating a viable ownership transition plan will depend largely on how the owner will transition the business or specifics of the business, Petix says. For example, the steps involved with establishing an Employee Stock Ownership Plan would be very different than handing the business down to the next generation. “In all cases, we focus on the goals and fact patterns and build a plan from there,” he says.

Begin Planning Now

Financial experts advise business owners to be proactive about their estate and business succession planning. Petix, for instance, cautions people to not get overwhelmed by the complexity of estate planning. Instead, simply enlist professional help to contemplate complex issues. He says: “Don’t procrastinate. Not making a decision is making a decision. If you don’t decide consciously what steps to take, default rules will come into plan. And it’s almost certain those rules will not be agreeable with you.”

Blattmachr’s general advice is for business owners to initiate the successor’s apprenticeship sooner than later. “It’s best to plan when financial waters are calm, when we don’t have any perceived deadlines for why things have to be done.”

However, Bruce says, many business owners become paralyzed because they don’t know how or where to start. So she advises owners to initiate a conversation about what they want to see happen and let professionals help them sort out all the details. “The first hour of discovery conversation is free with us [APCM] as we look to give business owners the encouragement they need to get the ball rolling,” she says.