Security For Loved Ones

Bad news: Death happens to all. Untimely deaths happen to some. An untimely death without proper planning may be detrimental to an owner's desire to build security for loved ones.

The IRS: Below is a profound excerpt from The Exit Strategy Handbook (pp.134-135).

The Internal Revenue Service (IRS) is desperate for cash. Our federal government's annual cash burn-rate exceeds its annual cash intake. The IRS is keenly interested in the value of your company, whether you are dead or alive. They expect to extract every farthing of taxes they can legally take. Below (is a famous case) regarding the IRS and (a) business owner who did not have adequate key (person) life insurance to cover the estate taxes owed after their death.

Joseph "Joe" Robbie was the original owner of the NFL football team, the Miami Dolphins (1966-1990). Coached by Don Shula, Robbie's Dolphins achieved a perfect season (17-0) in 1972 and two consecutive Super Bowl wins.

When Joe Robbie passed away in 1990, his family had to sell the franchise (in 1994) to pay a reported $47 million in estate taxes.

Robbie's estate was somewhat less than $100 million and almost 50% of it vanished in federal estate taxes. It compelled his family to sell the Dolphins at a fraction of its value. Strife and bitter resentments developed within the family because of the actions they had to take to pay the taxes. The real tragedy is that all of this could have been avoided.

If that $47 million could have been paid with a life insurance check, concluded Financial Planning (magazine), it would certainly have changed the financial complexion of the family's situation.

Key person insurance: Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business (www.investopedia.com).

Buy-sell agreements: Companies often have co-owners. Some are key to the operation and growth of the company. Some are silent owners. Regardless, the untimely death of a co-owner without a solid buy-sell agreement, properly funded by insurance, may negatively impact the desire of an owner to have security for loved ones.

An example: Assume a business has two co-owners. They may or may not have an equal share of ownership but both owners exceed 20% of the ownership of the company. One owner has an untimely death and the company has no buy-sell agreement properly funded by insurance. The company may not have the cash available to buy the ownership from the spouse and/or the estate (children, trustee, etc.) of the deceased co-owner. The new co-owner may not have the best interest of the company in mind. Consequently, the new co-owner may cause litigation and/or other extreme demands upon the existing co-owner. This litigation or extreme demands may negatively impact the desire of the remaining co-owner to have security for loved ones.

Estate planning: Proper estate planning is needed to define the rules and fund the desires of an owner for the security of loved ones. The planning may include the combination of wills, trusts, buy-sell agreements, insurance, etc.