business owner disability · 2019-02-18 · disability 3. create/review business legal documents,...
TRANSCRIPT
![Page 1: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/1.jpg)
Business Owner DisabilityA Trustee’s Perspective on Transitioning a Family Business
in the Face of Key Person Incapacity
The Gathering 2019 – San Diego, California Friday, February 22, 2019
Ann Rosevear, J.D. President & Chief Trust OfficerDUNHAM [email protected]
Sharon Buck, CFP®, CPWA®, CTFA,EA, ChFC, CLU, CDFA, CEPA, TEPVice PresidentNORTHERN [email protected]
![Page 2: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/2.jpg)
DISCLOSURESLEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.
This information, including any information regarding specific investment products or strategies, does not take into account the reader’s individual needs and circumstances and should not be construed as an offer, solicitation or recommendation to enter into any transaction or to utilize a specific investment product or strategy.
This information does not constitute and should not be understood as a recommendation with respect to the rollover, transfer or distribution of assets from an existing retirement plan or IRA account of any kind, including, without limitation, whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.
1
![Page 3: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/3.jpg)
TABLE OF CONTENTSToday’s Agenda – Business Owner Disability
1Personal Impact of Owner Disability
2Choosing a Trustee for the Closely-Held Business Owner
3Keys to Successful Planning
2
![Page 4: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/4.jpg)
ATLANTIS FINANCIAL GROUP & ATLANTIS MARKETING GROUPTHE COLE FAMILY
Serious Health Issue & Disability CEO/Founder became legally blind (Multiple Sclerosis)
No plan in place for Disability
Juggling personal needs (newborn) and business stresses
Regular business inflows quickly reduced
Regular business outflows increased
Medical expenses greatly increased
Hoped to weather the storm
Key business partners started looking for other opportunities
One business partner stole intellectual capital assets
By the time the business was sold, the value had significantly declined or been pillaged
Business Brief (Financial Services) Co‐Founder/Co‐Owner of Large Producer Group
Advisory Producer base of 1000+ financial advisors/agents throughout the U.S.
Financial Industry Speaker & Motivator
Developed high net‐worth clientele in Silicon Valley
Direct Mail Marketing Company selling ‘leads’ and sales training programs/materials throughout the U.S.
3
![Page 5: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/5.jpg)
THE GROWING LIKELYHOOD OF DISABILITY
DISABILITY STATISTICS
1 in 4 of today’s 20 “somethings” will become disabled prior to retirement*
37 million Americans are classified as disabled – 11% of the population**
50% of disabled Americans are in their working years (18 – 64)**
Longevity increases disability risk (4.5 years for men; 2.7 years for women in last ½ century***
The Odds of Disability:****
Your Age Likelihood of Long Term Disability
Average Duration
30 1 in 3 32 months40 3 in 10 42 months50 5 in 22 50 months60 1 in 10 54 month
* US Social Security Administration 2013** US Census Bureau 2017*** University of Southern California, 2016, www.sciencedaily.com****Source: Commissioners’ Disability Individual Table A 4
![Page 6: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/6.jpg)
Choosing a Trusteefor the Closely-Held Business Owner
BUSINESS OWNER DISABILITY
dunhamtrust.com | northerntrust.com5
![Page 7: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/7.jpg)
Trustee Duties &
Responsibilities
Get to know the beneficiaries Be aware of any special needs Analyze the assets of the trust to understand any special relationships with the beneficiaries Understand and special provisions of the trust for the beneficiaries
• Obtain all original documents• Retain records of all receipts and payments• Review the administration of the trust
Verify all trust assets are properly titled• Inventory assets and establish the cost
basis • Analyze all leases and contracts • Protect and secure all assets• Notice the beneficiaries as required by law
• Maintain confidentiality • Seek legal and professional advice• Disclose appropriate information to the
beneficiaries• Avoid all conflicts of interest
• Follow the trust investment powers and note any directions or restrictions
• Maintain an investment policy that includes the investment powers, resources of the trust and needs of the beneficiaries
• Avoid all acts of self dealing• Research all assets
• Follow the trust powers per state law, or as granted or limited by the grantor
• Typical powers include the power to:•Invest trust assets•Establish reserves•Borrow or lend money•Sell or exchange assets
Consult with beneficiaries and assist with planning where necessary
Apply income and/or principal to or for the benefit of the beneficiaries per the terms of the trust
Provide statements of trust activity as required
Maintain impartiality and loyalty
• Obtain tax identification numbers for each irrevocable trust and subtrust
File all tax returns required for the trust Minimize tax liability to the trust and the
beneficiaries Protest all improper tax assessments Supply income tax information to the
beneficiaries Maintain detailed tax records
Communicate with beneficiaries regarding the timetable for distributions and caution against spending in advance Make distributions or partial distributions as appropriate and prudent per the terms of the trust Receive receipts and releases from the beneficiaries as appropriate
Develop a Relationshipwith Beneficiaries Administration Code of Trust Ethics
Investment and Management Duties Fiduciary Powers
Duties to Beneficiaries Taxation Trust Termination
6
![Page 8: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/8.jpg)
Annually collect updated financial information
Evaluate performance and prepare annual reviews
Track receipt of entity distributions
Vote proxies and evaluate tender offers
Manage the valuation process for federal estate tax, sale, strategic or estate planning purposes
Evaluate and request Section 754 elections on partnership and LLC interests
Coordinate when necessary with internal partners and outside advisors on trust/client matters pertaining to the closely held assets
Coordinate sale of entities or interests
Determine if entity is being managed in accordance with governing documents
Provide transition management—typically in estate settlement situations
Guide and /or implement succession plans
Analyze and oversee strategic transactions involving closely held entities
Analyze and facilitate conversions of an entity (general partnership to LP or LLC) and/or of corporate tax status (C Corp to S Corp)
Confirm the following items on an annual basis:
Appropriate filings have been made and the entity is in good standing
Tax returns have been prepared and filed
Adequate insurance coverages are being maintained by the entity
TRUSTEE DUTIES FOR THE CLOSELY-HELD BUSINESS
General Administration and Oversight Administration & Oversight of Control Positions
7
![Page 9: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/9.jpg)
Formation of the board of directors and/or restructuring of management, if needed
Work with management to develop a strategic plan and operating budget for the company, if such plans do not exist
Monitor business results against plan and evaluate variances
Provide oversight of strategic initiatives
Evaluate and monitor executive compensation to assure that salaries are competitive and that management incentives are consistent with the objective of long‐term value creation for the equity holder(s)
Assure that succession plans are in place for key members of management as well as directors
TRUSTEE DUTIES FOR THE CLOSELY-HELD BUSINESS, CONT.
In some situations where appropriate, a corporate trustee employee will serve as an officer/director of an entity we hold in trust:
Situations where another officer is needed for back‐up or to address internal control concerns
To fill management voids created by the death/disability of an officer
Oversee the Funding Plan of a business transition, including related‐insurance coverages/pay‐outs, and employee incentives
Serve as an Officer / Director, where appropriate
8
![Page 10: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/10.jpg)
KEY BENEFITS OF A PROFESSIONAL TRUSTEE FOR BUSINESSES
• Not affected by death or disability ‐ permanency• Neutrality – immunity from undue family influence• Investment experience & skilled portfolio management• Comprehensive reporting ‐ transparency• Simplicity and convenience for family• Rich resources of advice, experience and referrals• Regulated, bonded, audited ‐ accountable
9
![Page 11: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/11.jpg)
• Business structures – particularly yours• Stakeholders – family and employees• Funding succession plans• Key owner / executive insurance• Non‐diversified trust assets (and will accept this)• Manages unique assets• Developing stabilizing plans (stay bonuses, buy‐outs)• Interplay between incapacity agent powers andtrustee powers
• Pre‐disability family councils & director meetings
THE RIGHT TRUSTEE DEMONSTRATES A DEPTH OF UNDERSTANDING IN:
10
![Page 12: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/12.jpg)
Applicable When:
o Business owner is not yet ready to retireo There is no formal board of directorso The family may have expressed a desires to retain ownership of the businesso Owner appreciates the need to have a knowledgeable trustee ready to acto Owner has named Trust Company in a future fiduciary capacity
(i.e. Successor Trustee)
Methodology:
o Attend board meetings, family meetings, strategic reviews and other events as applicable
o Review interim financial statements and reporting packageso Review corporate documents and important legal agreementso Maintain an active knowledge of the business and its key employeeso Maintain a plan of action for transitioning to a future fiduciary role
INVOLVING TRUSTEES DURING TRANSITIONS
11
![Page 13: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/13.jpg)
Keys to Successful Planning
BUSINESS OWNER DISABILITY
dunhamtrust.com | northerntrust.com12
![Page 14: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/14.jpg)
The Closely‐Held BusinessUsually Plays a Central Role
in All of theBusiness Owner’s Life
BASED ON THE FUNDAMENTAL PRINCIPLE
Business Owner’s Average Net WorthInvested in their Business = 78%
13
![Page 15: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/15.jpg)
• The business is often the primary source of support for the owner’s family
o How can I ensure my business will continue to thrive when I’m not around?o How will the business provide for my family if something should happen to
me – including disability?o Their business may not survive a serious health issue or disability
• People not active in the business may end up running the business (e.g., spouse or children)
• Key employees may get nervous about the future and look for opportunities elsewhere
LACK OF A WELL THOUGHT-OUT PLAN
14
![Page 16: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/16.jpg)
• The Buy‐Sell may not fit the current situation• The owner may not have thought the situation all the way through, including how to handle a serious health condition
• The Business Owner may not have disclosed all the important information with their attorney
• Corporate Governing Documents May Conflict With the Trust • Mirroring the transfer of control
• Lack of Proper Funding – particularly for disability• Business may put an economic burden on purchaser(s) – unintended assets may have to be liquidated
• Sale may not be completed – particularly in installment sales
COMMON ISSUES
15
![Page 17: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/17.jpg)
If key employees are not retained:• The business may falter, adversely impacting the owner’s future;• The value of the business may be diminished; and/or,• The heirs’ chances of success may be diminished
Will the remaining team be able to continue to generate revenue and successfully continue the business?
Only 27% of surveyed businesses have a funded retention program for key employees
BUSINESS CONTINUITY ISSUES
16
![Page 18: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/18.jpg)
1. Convince your business owner clients that they need to plan. The corporate trustee can help, and work with all the owner’s advisors, to collectively determine the best plan to meet the client’s personal & business reality
2. Assist the business owner think through all the what‐ifs….including disability
3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their business
4. Discuss Funding Options – including Disability Insurance, Disability Overhead Insurance, Cash‐Value Life Insurance, personal assets and sinking accounts
5. Choose Suitable Successor Trustee to run the business and Begin to Work with them NOW
PLANNING FOR THE CLOSELY-HELD BUSINESS OWNER
17
![Page 19: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/19.jpg)
REMEMBERA PLAN IS THE GREATEST GIFT
ONE CAN GIVE TO YOURSELF AND
TO THOSE YOU LOVE.
To borrow a popular Scouting motto, “Be Prepared!”
How prepared are you?
18
![Page 20: Business Owner Disability · 2019-02-18 · disability 3. Create/Review Business Legal Documents, and Trust Documents, to evaluate whether they fit the client, their family and their](https://reader034.vdocuments.site/reader034/viewer/2022042408/5f241cd5c9e16e33d74338c4/html5/thumbnails/20.jpg)
northerntrust.com | © NorthernTrust 2017
THANK YOU!
QUESTIONS?
ANN ROSEVEAR, J.D.President & Chief Trust OfficerDUNHAM [email protected]
SHARON BUCK, CFP®, CPWA®, CTFA,EA, CHFC, CLU, CDFA, CEPA, TEPVice PresidentNORTHERN [email protected]
19