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Multi-Generational Planning . . . In Reverse

Generally we think of multi-generational planning as moving from parent to child to grandchild, and so on.  Recently a trend has developed where savvy children are encouraging, and even funding, their parents and grandparents to plan or update their estate plans.

Children are often concerned about protecting their inheritance from a parent’s second or third spouse.  Some want additional protections from divorce or lawsuits in their own lives.  Others want particular heirlooms or other family legacies to stay in the family.

Many times people just don’t want to think about a time when they will be gone, and so they avoid doing any planning at all.  Surveys generally show that over 50% of the population fails to plan for what happens after their death.  Now, I see adult children trying to prevent problems by getting their parents to do the planning, in some cases paying for the plan themselves.

I think there is some justification in this, as it is the children that will primarily benefit from the planning.  They can avoid the time, costs and expense of probate.  They avoid the years of fights with siblings.  They benefit from well-crafted asset protection.

One item of particular sensitivity is the transfer of a business from one generation to the next.  Often that transfer takes place over years as value and control change hands.  Failure to plan the transfer of a business to the next generation can cause a series of problems.  Businesses can lose significant value (80% or more) when the owner is suddenly disabled or dies.  This decrease in value due to sudden disruption hits professionals, such as accountants, financial planners, medical professionals, and attorneys particularly hard because clients are often tied to a particular person and it takes time to transfer their trust and confidence to another professional.

When there are multiple beneficiaries who will inherit a business, often causes conflicts.  These conflicts are heightened when some of the beneficiaries are involved in the business and others are not.  Issues such as a fair valuation of the business, use of business revenue (as dividends or to grow the business), control and interpersonal differences – difficult to resolve in isolation – become amplified by grief and other emotions that accompany tragedy.

Even casual attempts at planning can cause problems.  For example, Bob’s son asked me to consult with him and his dad.  Bob (the father) owned a business that was worth about $2 million dollars.  Bob also owned a building with a net worth of about $4 million.  The business was located in, and used the building to run the business from.  Bob’s son was involved in the business but Bob’s other two children were not.  The answer of how to divide Bob’s estate seemed simple and so Bob’s trust gave the business to his son who was working in it and the building to the other children.

When we analyzed the situation, it was revealed that the business was not paying anything close to fair market rent (about 20% of fair market rent).  This created a conflict and a fairness issue.  If the two children were to raise the building’s rent fair market value then the business would become only barely profitable and the business’ true value would be significantly less than $2 million.  If the rent was not raised the other two children would not receive fair value on their inheritance and their actual inheritance would be worth considerably less.

We were able to present several solutions to Bob and his family and resolved the conflicts in Bob’s original plan.  In addition, with the true value of the business revealed Bob and his son were able to make changes to the business that increased both its profitability and the value of the building.

Thanks to his son’s actions, Bob and his family were able to avoid facing a problem at the worst possible time.

By acting before a crisis arises and seeking the expertise of trusted advisors you can mitigate or prevent problems for your family and yourself.  The key is to do the planning before a situation develops.

Michael E. Garner

Creative Approach to Entrepreneurship

If you’ve arrived at this post via e-mail link, then you’re in the right place to participate in a discussion about creative approaches to entrepreneurship. Once registered on the blog (you need only register once), you can log in to comment on any post.

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I’ve been cleaning and clearing for several weeks, and in the process listening to snippets of the news about the state of the economy. The downgrade by the S&P of the United States of America’s credit rating is a bitter taste of medicine for all.

In my email of July 24 I suggested that:

In addition to dealing with the present we need to get ahead of the game by preparing for the future…for a future. With our combined skills and passions, we entrepreneurs (of all people), are most prepared to lead the way. Some call it teaching; others, coaching. Working together and helping each other is part of what makes us human, and ensures our survival as a species. Science has taught us this much.

I’m looking for members who want to work together and join in a discussion about how we can design a program to provide entrepreneurial opportunities. If you think you don’t belong here because you think you’re not creative…don’t let the word scare you away…by the very nature of the fact that we are all entrepreneurs or independent reps, as well as networkers, makes us creative by nature. We have not conformed to the Stepford World.

If you think there’s nothing in it for you, it doesn’t exist yet, and there obviously needs to be incentive for business, which, I’m sure will be part of our discussions.

In a world where everyone needs to make a living, life is short and you only live once, I’ve always believed you should be able to kill two birds with one stone, do what you love, and live indoors and put food on the table. (Is that too metaphors in a single sentence?)

Would you like to be part of a group that creates a structure in order to share information about how to become effective entrepreneurs and transition to new entrepreneurial careers?

That being said, let the discussion begin.


Ever Considered a Pet Trust?

Do you have a pet dog, cat or horse?  Are you concerned about what would happen to them if you died?

If you live in California (or one of the other 40 states with similar laws) you can create a “Pet Trust.”  Passed in 2008, Probate Code section 15212 sets out the guidelines for creating a pet trust.

To begin, identify your pet.  Then pick one or more people you trust to care for the animal and manage the money (the “Trustee”).  Finally, choose where you want any left over money to go following your pet’s passing.  Pretty simple.  Even better you can include your pet trust in your revocable living trust, create a stand-alone trust, or create it with your Will.

A few of words of warning:

  • First, the law is relatively new and unchallenged and, in my opinion, poorly drafted, which ultimately means it is open to interpretation and challenge.
  • Second, the pet trust statute allows almost anyone to petition the court about the trust or the trustee or just how things are being managed.
  • Third, if the pet trust holds more than $40,000 the trustee must provide accountings not only to the future beneficiaries but any nonprofit charitable corporation [that cares for animals] that asks.
  • Fourth, any beneficiary, the court or any nonprofit charitable corporation [that cares for animals] may inspect the animal and where the animal is kept – that may be okay for a public kennel, but not so good if your pet lives in your Sister’s home.

As with any Trust, you want to make sure the attorney drafting your documents is experienced and explains all of the issues involved with a Pet Trust.  Otherwise you may be giving legal headaches to the person you want to care for your 85 year old parrot.

Michael E. Garner
Cornerstone Law Center, Inc.