Although it has been almost five years since the beginning of the U.S. financial crisis in 2008, the wounds from that economic downfall are still fresh for many business owners.
As the economy suffered, so too did millions of owners of American small businesses, which make up more than 99 percent of all businesses in the U.S. Those economic woes forced many baby boomers on the threshold of retirement to hit the pause button and, instead, focus on nursing their businesses back to health.
But, with a stronger U.S. economy, many of those same business owners are dusting off the idea of retiring and implementing a multiyear business suc-cession. Many have shifted from when he or she can retire to how he or she can retire.
The first (and hardest) step to take is walking away from the business. Many owners have spent their entire lives building a successful business. And, when the time comes to retire, letting go of control over that business can be very difficult.
This can lead to serious problems within the business. The new management can get frustrated and angered. Workers can become confused on who is in charge. Both can affect the productivity of a business.
The best thing for the owner to do is to let it go and trust the people whom he or she has chosen to lead the next phase of the business. After all, what good is a business succession plan if there is no actual succession? Separating oneself from the day-to-day structures of the business will help not only those left operating the business, but will also help make retirement for the owner much less stressful.
Before taking that giant stride into retirement, the “how” of affording retirement must be clearly answered. Although it seems like a basic proposition, many owners fail to plan properly for life in retirement. Once they walk away, they realize they do not have enough income to sustain their lifestyles, and they find themselves walking right back into the business out of necessity, creating the aforementioned angst and confusion.
A good lawyer should be a source of clarity before any decision is made to retire. He should recommend that the owner consult with a financial advisor, who will be able to help determine whether the owner has enough resources to retire and develop an appropriate financial strategy, both before and after retirement, which will accommodate a comfortable life-style.
A strong financial consideration for a retired owner is taxes. With fed-eral and, in many cases, state income tax rates rising, retirees will need to consider income tax planning. Several states in the U.S. do not impose state income taxes on their residents. It is a particularly enticing advantage of retiring in Florida, not to mention the comforts of sunshine and warm weather. But it isn’t just a matter of pulling up stakes and moving.
To receive these benefits of the Sunshine State, one must become a Florida resident, which is no simple task. While there is no true litmus test for establishing Florida residency, generally you must live in Florida more than six months each year and take additional steps that prove your intent to establish a Florida domicile. This might include obtaining a Florida driver’s license, registering to vote in Florida, transferring bank accounts to Florida, and filing federal income tax returns using your Florida address. More importantly, one should take the necessary steps to avoid Illinois residency by severing any such connections to Illinois as described above.
Another part of a retiring owner’s financial analysis should include a thorough review of eligibility for governmental benefits, such as Social Security and Medicare.
Generally, an individual becomes eligible under both programs at age 65 (or as high as age 67 for Social Security, depending on the year of birth). These benefits can be significant resources for a retiree’s income and health care needs. But, keep in mind that high-income taxpayers may have to pay higher premiums if they elect a certain part of Medicare coverage.
Finally, the retiring owner should review his or her current estate plan for any necessary updates or changes. I typically suggest that clients review their estate plans every three to five years. However, I often find the time period for review ends up being much longer. The details and needs of an estate plan for a young business owner and his or her family at age 40 can be considerably different from those of a retiring business owner at age 60.
An estate planning lawyer can evaluate the existing estate plan, including a review of beneficiary designations for retirement accounts and life insurance policies, and help make any necessary changes that best fit the overall retirement plan.
The journey to retirement was delayed for many business owners following The Great Recession. Now that economic conditions are reasonably stabilized, the temptation may be to rush into retirement. As blissful as the golden years may sound, the path to getting there remains fraught with unexpected challenges if you don’t properly plan first.
GARRETT REUTER JR. is an attorney in the trusts and estates practice group of Greensfelder, Hemker & Gale, P.C., which has offices in Belleville and Chicago and is headquartered in St. Louis. He serves clients in a broad range of estate planning and general business matters.