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22nd May 2019
:: Adviser | Productivity | Can you afford to die at midnight tonight?

Can You Afford to Die at Midnight Tonight?
It’s always an uncomfortable question, but one all business owners must look at.
Most of us have put in place plans for our family should the worst happen, but have you really considered what will happen to the business – and this will affect your family too – if you get run over by the number 62 tonight?
We are pleased to feature here the second in a series of articles written by an expert in Business Exit Strategy.
This is essential reading for all business owners.
Can You Afford to Die at Midnight Tonight?
by Gary Gardner and Hank James
“Can you afford to die at midnight tonight?” This is the second exit strategy planning question and it deals with a subject most don’t enjoy discussing. We encourage you to read on as we present some ideas to prevent your spouse and other heirs from inheriting a financial and business operating mess.
When an individual loses a spouse, there is no article or handbook that can begin to understand what the surviving spouse and family are going through. Immediately upon death, there will be a host of financial details to deal with. The surviving spouse will be overwhelmed, distracted, disinterested in dealing with the myriad of financial details and prone to financial misjudgements.
The best strategy is to make estate plans, while living.
In the first of our series on exit strategy planning, we talked about getting to “Yes” on the question, “Can you afford to exit your business?” Even after you answer, “Yes” to the first question, you have to face your mortality and possibility of being hit by the proverbial bus. You may not make it to midnight tonight. To be truly financially independent, you have to answer, “Yes” to both questions.
You, as a business owner, face an entirely different level of estate planning than your non-business owner peers. In this article, we will emphasize the business aspects of your estate plan, and also we will give you a checklist of general estate planning items to assist you.
Estate Planning for the Business
What happens if you don’t make it to work in the morning? Is your business worth the same? If not, your heirs may find themselves unpleasantly surprised when they suddenly own a business that could be rapidly deteriorating in value because you are not around. And if the proper succession of ownership and management is not in place, the deterioration could be exacerbated by the bickering of the heirs.
Succession Plan
Every business needs to have a succession plan. A succession plan has two aspects: succession of ownership and succession of management. Just because you, as the current owner, manage the business, doesn’t mean that your successors have to both own and manage the business. You need to separate these two aspects in your planning.
Succession Management
On a recent project to sell a distributorship, six of the ten prospective buyers refused to bid on the project because there was no successor management (the active owners wanted to sell out and leave). The other four bidders showed deep concern and though we don’t know by how much, all indications are they discounted their bids substantially.
In our experience, succession planning adds value to the business, whether or not the current owner’s exit is imminent. We recommend you institute an active program to train a replacement for every job in your company, even yours—especially yours. This means that you need to set up systems and budgets to operate the company without your day-today supervision.
Once you have the systems in place, you should take increasing length vacations to test your systems and your managers’ performance.
Succession management planning is a triple win for you: You get free time away from the day-to-day business pressures; you increase the value of your business in a sale; and it doesn’t lose value upon your death or disability.
Succession Ownership
As we mentioned above, the owners and managers don’t have to be the same people. You can set up a Board of Directors in which the owners control the long-term strategy and select the key managers, delegating the day-to-day operations to the management team. Even relatively small companies can benefit from the discipline and insights a Board brings.
The Board of Directors model can be used for intergenerational transition with the advantages of keeping the business (remember you make more money by keeping the business than by selling it). When you are no longer around, the members of the Board change, but the business management is intact.
Another advantage of not selling is inherited stock gets stepped up basis for income tax purposes. This means your heirs will pay substantially less income taxes than you would have, had you sold it. (Gifted stock does not get stepped up basis, however.) [Check the UK tax laws in this respect. Ed.] Running a business through a board of directors is fun. It lets you clip coupons and have all the freedom you desire.
Multiple Ownership
In any multiple ownership situation, you will need a buy/sell agreement that defines how you dissolve the relationship, be it for death, disability, incompatibility or any other reason.
Intergenerational Transition
It’s best not to give, devise or sell shares of your business equally to each of your children. One person needs to have control of the business.
We know of a situation where the father died and willed the company equally to two brothers. Everything went amicably at first, until one of the sons married an aggressive lady who imposed her will on the business. The result was animosity, lawsuits and ultimately bankruptcy of the company due to the horrendous legal costs of the brothers suing each other.
Give one person control and equalize (if that is your desire) the other children’s inheritances with non-business assets, or if necessary, insurance. In intergenerational transition, once you decide on the person(s) who will be participating in the ownership and management of the business, get them in the training program and actively participating. Don’t wait until the lawyer reads them your will for them to find out they are responsible for running the company.
Estate Planning General
In our society, every person needs a will.
A few months ago, we talked to a potential client who owned a nice business, generating about $1 million per year in take home pay for him. He was in his early forties with a spouse and two young children. He had a great business and no will—unconscionable! Let’s look at the risks he is taking should he get run over by a bus tonight:
  • Financial independence for his family. He may be making great money now, but will his family become financially independent without his current earnings?
  • What happens to the value of his business if he’s not around?
  • Asset and money management: Do his heirs have the skill and knowledge to manage the family assets?
  • Will he pay too much estate tax? No estate plan means potentially paying maximum taxes.
  • Does he have enough but not too much life insurance?
  • Will there be enough cash flow for the transition period and for estate taxes?
You need a will and it needs to be reviewed at least once per year. Life events and law changes occur frequently. Using a good estate-planning attorney who has annual review conferences is well worth the money. Each person’s estate, assets, legacies and heirs are different. Preprinted stationery store wills are inadequate to do the job.
Living Trust(s) and Other Trusts
A living trust is a probate avoidance strategy. It doesn’t save current income taxes, but properly structured, sometimes with other trusts, it can mean substantial savings in estate taxes.
Without a living trust, your estate is facing the costs, the time and the publicity of probate. Each state has probate laws that dictate the distribution of the estate, which may have little relationship to your desires. For example do you want your step children to end up with more of your estate that your natural children? It could happen with your state’s probate distribution formula.
We see many business owners who have set up living trust. They hear that it probably makes sense to set one up; they go to a seminar, buy a canned trust and think they are set. Not! Most do not follow up and put their assets in the trust and almost never do they review the trust periodically to reflect the tax and life event changes. And do you really think a one-shoe size fits all trust is going to meet your specific estate planning needs?
Most people are well served with living trusts.
Depending on the size of your estate and your desires in the ultimate distribution of your assets, good tax planning may dictate you setting up other trusts.
Durable Power of Attorney
What happens if to our potential client above if he doesn’t die when hit by the bus, but he is severely debilitated? How are decisions about his health and finance handled under these stressful conditions? A durable power of attorney needs to be set up to handle such situations to give authority to someone you trust to run your affairs rather than the courts. Inform key people of your preferences. Notify your doctor, family and close friends about your end-of-life preferences. Keep a copy of your signed and durable power of attorney safe and accessible. This will help ensure that your wishes will be known at the critical time and carried out. Give a copy to:
  • The person you appoint as your agent and any alternate designated agents
  • Your physician
  • Your health care providers
  • The health care institution that is providing your care
  • Family members
  • Other responsible person who is likely to be called if there is a medical emergency
Estate planning is not fun. We do not like to deal with our mortality.
For most private business owners, the business is the engine that generates the wealth. To be truly financially independent, you have to plan for the success of that business whether you exit the business through a sale or through your estate. And for both questions: “Can you afford to exit your business?” and “Can you afford to die at midnight tonight?”, you need to be able to answer, “Yes!”
Ó Henry S James 2007
This has been adapted from an original article written by Gary Gardner and Hank James.
Hank James, from WealthTrax Inc., is an Exit Strategy Mentor based in the United States, and can be contacted on
You can view Hank’s website at

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