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Succession plan pitfalls avoidable

Published on December 10, 2010 3:01AM

Last changed on January 7, 2011 7:38AM

Carl Sampson

Carl Sampson



Capital Press

Some years ago I worked as a financial planner in a southern Minnesota farm town.

Most of my clients were farmers, and I worked closely with them and their accountants and lawyers to help them fund their retirement plans and solve the other issues they faced.

One of the issues we spent a lot of time on was succession planning. This was the primary issue facing nearly every farmer I knew. Every meeting included that topic.

Sometimes, I felt like a family counselor. One client who was in her 80s would come into the office every month or two. Her purpose: to change the beneficiaries on her insurance policy and annuities.

"Why do you want to do that?" I asked one time.

"I'm just so upset at my son," she said. "I want to cut him off."

Mind you, her son was not a wild teenager. He was in his 50s and ran the farm.

"I'll do whatever you want," I said. "I just don't want you to make a decision you could regret. If you cut off one or several of your kids you could destroy the family.

"Think about it."

"Oh, OK," she eventually said and headed out the door -- until someone else upset her a couple of months later.

During discussions about succession planning, three major stumbling blocks usually arose: Cost, follow-through and keeping everyone informed.

"How much will that cost?" was usually the first thing out of a client's mouth when I suggested getting together with his lawyer and accountant to discuss succession planning.

"A few thousand dollars," I would say. "I really depends on what's needed. If you need to set up a trust it will cost more than if you need only a will."

Many of my clients would roll their eyes at the thought of "wasting" money on a plan.

I wouldn't press anyone, but I would say that Uncle Sam and the state tax collectors appreciated their contributions. A farmer with no will meant a big pay day for the tax men.

"And what if the kids need to sell the farm or take out a big loan against the farm to pay off the estate taxes?" I'd ask. "There is only one way to minimize your estate taxes -- a succession plan."

Similarly, a lot of thought needs to be given to how to pass the farm on to one or more of the kids and do it fairly.

Once they decided to talk with their lawyer and accountant, clients were usually surprised that their plan cost less than they had feared. Compared to the federal and state taxes that would have been assessed against the estate, a succession plan was always a bargain.

The second major stumbling block was follow-through. A lawyer can put together a great succession plan, but if the client doesn't follow through and change the ownership of his assets to reflect the plan, it is meaningless.

Sometimes, it's just a matter of changing the ownership of some assets, including life insurance policies, to make sure it all doesn't pile up in one person's estate.

I once had a client who owned a successful business. He had gone through the expense of setting up a succession plan using a trust, but there was a problem. All of his assets were still in his personal ownership instead of the trust's ownership.

"It doesn't make any difference," he told me.

"I'm not your lawyer," I told him. "Check with her."

A few days later, he called and thanked me.

"You were right," he said. "All of the ownerships needed to be changed."

The third stumbling block was keeping everyone informed.

One day, the wife of a client came in after her husband's death. She was devastated, not just at the loss of her husband but at the thought of being broke and potentially losing the farm. Her husband hadn't shared their finances with her. In fact, she didn't even know at which bank the checking and other accounts were located.

All she had was a box full of statements.

We spent a few hours getting her organized and made some phone calls to verify the information on the statements. Much to her relief, it appeared she was in good shape financially.

Had her husband kept her informed, he could have avoided the trauma he had caused his wife.

Death may not be avoidable, but causing pain to your family is.


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