Tragedy Strikes a Succession Plan

Wednesday, July 28, 2010 by the Editors of Dow Jones Newswires - TAYLOR SMITH

Even when a family business has a solid succession plan in place, a change in circumstances can throw a wrench into the works.

Dallas-based financial adviser Mike Reppert, a senior partner at Spectrum Advisors, helped guide a client through just such a situation.

The client, now in her late 80s, owned a Dallas jewelry business. She had run it with her husband, who died 15 years ago, and they had planned to pass down the store to their son. But events threw that plan out the window. Several years after the husband's death, tragedy struck the family again when the son was diagnosed with multiple sclerosis. "It's just too complex of a business for an older lady and a guy with MS," says Reppert. "The son's MS began to progress so much he wasn't able to play a role, and she didn't want to spend all her time at the business."

What started as a business succession plan turned into a complicated estate-planning riddle. The question: How could the family use the assets of a waning business to provide for an elderly woman and her disabled son?

In most cases, the answer would be to sell the business and distribute the proceeds among the family. In this case, however, Reppert saw a lot of value in the company--even though neither the mother nor the son was able to keep it going.

So Reppert put the business into hibernation. He helped the family sell its assets, which netted a "significant amount." They kept the company alive but dormant, filing a tax return each year even though there was no revenue and continuing to hold investments in the business' name. "We got rid of the inventory and overhead, so there's no new revenue coming in and there are no new expenses," says Reppert.

Keeping the company alive allowed Reppert to open a medical reimbursement account for the son, who faced mounting bills for his MS treatments. Companies--even dormant ones--can establish a medical reimbursement account as a perk for an employee, to reimburse out-of-pocket health-care costs. The money paid through the account is classified as a reimbursement, so it's tax free. "He's essentially drawing down his inheritance, because the business was going to go to him anyway," says Reppert.

This system enabled business assets to be drawn down before the son's personal assets were tapped, and that in turn meant his wife wouldn't be left out in the cold if he predeceased his mother. (In that event the son's sister would inherit the remainder of the business assets.) "We want to make sure the son and his family get all the value they can out of the business for the rest of his life," says Reppert. (The sister, who will inherit a house and other assets, is happy with the arrangement.)

Reppert also worked to persuade his client to take out a long-term care policy so a major medical issue wouldn't eat away at her estate. She agreed, after several entreaties. Fast-forward three years: The mother is diagnosed with Alzheimer's disease and moves into a long-term care facility.

"That policy is paying for her care--and preserving the estate's value for her heirs," says Reppert. "The message here is that advisers need to help clients stay ahead of care needs."