One of the questions I ask is “How are you going to dispose of and walk away from your business? How are you going to treat your family members equitably?”

Business represents 90% of your net worth, and you've got three daughters who are not in the business and two sons who are. So, you're going to give the two sons the $20 million, and you have another $1 million or $2 million that you're going to give to the three daughters.

Is that equitable? And the answer is no. Well, how are you going to treat them so everybody comes out equitably?

And that's where life insurance comes in. You can buy life insurance, give the business to the sons, have enough life insurance outside the estate that goes to the children, so they all get the same amount of money. But the business does not have to be liquidated in order to solve that issue.

I had one case, the father wanted to do exactly that. The mother said, “No, everybody has to be treated equally. We have five kids. Everybody has to get one-fifth of the business.” We only had two people that were in the business. The other three weren't. And I said, “If you do that, you're going to have the three children who are outside the business who now have control of the business, telling the people who are running the business what they can or can't do. The chances of your business surviving are pretty slim.”

They wouldn't do what I recommended. I ended up walking away from the case. I don't know what happened in the long term, but I know that I've had other cases like that where the business has disappeared because the family members could never agree.

A good client question is one where they can't answer yes or no. Yes or no doesn't really tell you much of anything. Instead ask, “How do you want to be remembered? How are you going to settle your estate? How are you going to pay the estate taxes? Who's going to run the business?”

You have two children. They're both in the business. But who's going to run the business, and how are you going to treat them equitably? And what are you going to do in this partnership? You've got six partners in the business. How are you going to buy out somebody if they want to walk away, or if they run into a tree while they're skiing?

And I actually had a bunch of anesthesiologists where one of the partners skied into a tree and killed himself. And we had insurance on him, and they were able to buy out his part of the practice. So, it's the who, what, when, where and why questions.

Over the years, I developed a whole list, all the types of questions you need to ask. And they’re categorized as to whether it's a business-type situation, a family situation, an investment-type situation.

So, a young guy who's not accustomed to asking these questions could look right down through there and take the questions with him into a meeting. Maybe print them out and have a space where they can write notes, and they can ask the questions and take a note.

Transcript

Build a client’s lasting legacy

Author(s):

Marvin H. Feldman, CLU, ChFC