Darcy Houghton: Don't forget business planning

How do business planning and estate planning work together? Estate planning is the process of making sure that there is a plan in place to take care of you and your loved ones today, during a period of disability, and when you are no longer here.

A business is often the piece of the owner's life that receives more attention than the owner's spouse or children, but is often given a one liner in the estate plan. Business planning, in the estate planning context is not - what is the annual return on investment, what are the sales goals, or how to control expenses. Estate planning for businesses looks at how the business will provide for the family when the family dynamics change.

To illustrate, let us assume that we have dad's business and he unexpectedly suffers an illness that leaves him with one year to live, but he will not be returning to work. Mom has not been involved in the business on a day-to-day basis. The oldest son worked in the business while he was in high school but now has a family and a job in another city. There is no identifiable person to run the business, much less buy it - and of course, the business has bills like rent and utilities, even when it is not generating income.

Let's also assume that the business had significant payroll and now becomes worth $3-5 million if operating, but worth only $1 million if not operating. And, let's also assume that the family had intended to retire on the proceeds from a later sale of the business, meaning that there is no pile of cash upon which to retire.

We will discuss formal "succession planning" in another article and that is likely a big piece of the answer to the above dilemma. Other options might be to look at insurance to cover a disability or to provide funds to cover the debts from the ongoing expenses and leave mom with resources. And, there must be a way to keep the business operating.

In this short column we won't find the answer, but there are many options and each family is likely to select something slightly different. The point is to develop some understanding that the family business needs some tender loving care in the estate planning context.

Estate planning is about taking a family's social circumstances (who are the loved ones and how are those individuals situated) and combining that with the family's financial circumstances. This example shows a family that has potentially simple social circumstances, but the financial circumstances have some significant risk associated with them, even if the associated assets are small, the liabilities from not operating could be substantial. Proper estate planning can provide the opportunity to not only maximize the value pulled out of the business, but it can start of the discussion of a back-up plan or proper diversification for business owners. Stay tuned for more thoughts on estate planning for businesses.

• Darcy Houghton is a resident of Carson City and accepts cases in estate planning and business law. She may be reached at 775-882-1777, or visit her website at www.hou2plan.com.