Companies lose badly without clear estate planning.

Ramiro Beltran and his wife Deborah have a long-term strategic plan for their family-run business, Reseda-based Triple A Rents and Events, which they launched five years ago.

"We know where we're going and how to get there," says Beltran, who worked in the party rental industry for years before setting out on his own.

The Beltrans also have a pretty good idea who will eventually take over the business when they retire: their daughter, now 13.

He won't give out revenues, but Beltran says the business is profitable and growing.

But ask Beltran if he or his wife have an estate plan and a written strategy for transferring the assets of the company upon their deaths, and he says he's simply ply "not gotten around to giving it much thought."

"I'm not ready to think about that," said Beltran.

"But maybe over the next couple of years we will start to."

It's a common scenario: business owners, particularly First generation leaders who are relatively young, don't want to think about death, and they certainly don't want to ponder the taxes they are required to pay on the value of their firms when they do pass on.

But the experts say it's never too soon to think about estate planning, particularly if there are children in line to take over the family time Delays can be devastating: what often happens when a company hasn't prepared is the children inherit the business, get slapped with a hefty estate tax and wind up having to sell off the family firm to pay up.

"That's the classic situation," said Joe Paul, a consultant with the Aspen Family Business Group in Portland, Ore. "So many family-run firms put this off because it's an issue they don't want to address. There is so much tension between family members over this issue, and it's not just younger family members. There are children in their 50s who are working for their parents and don't want to address it, even though their parents are heading into their 70s and 80s and talking very freely about retirement."

$1 million exemption

Currently the family business estate tax is based on net fair market value of the business with a $1 million exemption that will increase incrementally each year until 2009, topping out at $3.5 million, thanks to 2001 legislation aimed at helping family firms.

The exemption increases are obviously good for the business owner, but a relatively recent political quid pro quo set this tiered system up as an experiment. And, according to Paul and others, it's unclear what will happen in 2010, when the estate tax will be reviewed, so its better to plan as if nothing will change at all.

The way the system is set up now makes it almost impossible to appropriately plan, so you sort of have to prepare the (estate plan document) on the assumption that you are going to die, and that taxes will be due," said Michael Hackman, a partner at Encino-based Lewitt, Hackman, Shapiro, Marshall & Harlan who specializes in estate tax law.

So what can family run firms do now to hang on to the bulk of their company's worth?

First off, hire an estate tax attorney and educate yourself on the options that are available for protecting the assets.

"You need a good attorney and you need one that understands the laws as they pertain to family businesses and all of the complexities that are involved just by virtue of having family members working together," said Paul.

So what are some of the options?

Under the marital deduction, a business owner can transfer an entire estate over to a spouse tax free, plus take advantage of whatever the current tax exemption may be.

But when the spouse dies, the tax will come due, and someone's going to have to pay it. So there needs to be a plan in place for transferring that spouse's estate before they die.

Another option is gifts: current laws allow family-run businesses to transfer assets of up to $10,000 a year tax free to as many family members as they like, each year with a limit currently set at around $600,000. And, if there are two parents listed as the owners, both can take advantage of the gift exemption on top of the current family business tax exemption.

"This is a good way to start protecting the value of the company early on," said Paul. "And because there is no limit on the number of children who can receive gifts, a family business owner with five or six children, for example, can certainly manage to protect a significant amount of their estate while building up file assets."

The children of business owners can also use those gifts to purchase life insurance policies on their parents, then later on, use the policy payouts to cover the estate tax. But it's important to buy the life insurance as early as possible because as people age, policies get more complicated and costly.

"If the parent bays a life insurance policy on themselves and the kids inherit it, they have to pay taxes on it," said Paul. "So that's why the money is gifted to the children and the children buy it. But it's very important not to wait until too late to buy a policy. It needs to be done while the parent or parents are still eligible, and, it can be expensive."

Establishing a trust

Some business owners may opt to establish a company trust to distribute assets to their beneficiaries at pre-determined increments and amounts. However, although the trusts can be established tax free, the beneficiaries will still have to pay taxes on dividends, albeit, they won't be as high as taxes on straight estate transfers.

In general, every family run firm with an interest in either building up a legacy for future generations or ensuring that an existing legacy doesn't die with them, needs to establish an estate plan, even if there are uncertainties, because the plan can always be changed. "The family business succession plan should include an estate plan, and, even if there are no children in line to take over the family firm, estate planning should still be a part of that process," said Hackman. "A lot of family-run companies that are relatively young think it's too soon to have an estate plan because they don't know who's going to take it over, or how many of their children will be in line for revenue sharing, or even if the business will out live them. But an estate plan can always be changed to reflect those unknowns."

Paul pointed out that a family business estate plan is much more than a blueprint for wealth and how to pass it on. Estate plans should and often are crafted to serve as a moral and sociological compass for future generations.

"The estate plan itself is a message to future generations that the founders or owners will likely never meet, so it's very important that it contain a clear message," said Paul. "Sometimes the family will say they want to place a priority on education for the next generation, or maybe the whole goal is to preserve the business. An estate plan should contain details about that vision as a way to ensure that the worth of that company is used in a way that they intend it to be, and not something they would never have agreed to."

Estate Guidelines 

* It's never too early to establish an estate plan, even if there are no children in line to take over the family firm.

* Keep current on tax laws and the on-going changes to the estate tax.

* Consider offering family members tax-deductible gifts and start distributing them early to lower your tax liability. Consider life insurance policies that can be used down the road to pay the estate tax as opposed to relying on company earnings.

* Talk to your attorney about establishing a tax-free family business trust to serve as conservator of the company's assets down the road.

* Think of the estate plan as a message to future generations who will run your company, even if they haven't been born yet.

Source: Business Journal research