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What Happens When an Owner Dies Without a Buy-Sell Agreement

August 4, 2015

Not having a buy-sell agreement doesn’t mean anything UNLESS a co-owner dies, becomes disabled, becomes bankrupt, divorced, wants to quit, retire or many other things.  Recently, I received quite a few calls from accountants with clients that need valuations because a co-owner had died suddenly without a buy-sell agreement, prompting this blog.  Here is a bleak picture of what happens and what can be avoided.

The scenario being used is a business owned by two friends that started it 20 years earlier.  They are pretty successful and make good livings, fund their pension plans, have money left over each  year to provide for modest growth, but they haven’t accumulated any extra savings and they each still have home mortgages and kids in college.   They are both 50 and one dies suddenly.  The survivor will have to buy the interest from the estate of his deceased partner but doesn’t know what to offer and cannot afford too much.  Now, the problems and costs begin.

The business accountant is asked to determine what the widow should be offered and he comes up with a reasonable amount but the survivor doesn’t know how he could manage the payments unless it can be spread over five or six years.  This has to be discussed with the widow, but first, the survivor needs to make sure the business stays on track.  These are some of the things he has to deal with right away:

  • His hours jumped up and also included the need to start earlier and go home later
  • He has to hire someone to replace some of the work the partner was doing
  • He has to find out all the nitty-gritty his partner was doing and start doing it
  • Customers need to be contacted that business will be as usual
  • Some of the employee responsibilities need to be shifted and more time needs to be spent managing the staff
  • He has to assure suppliers of the continued viability of the business
  • He has to meet with the bankers to comfort them
  • He will also need to spend time with the accountant to discuss cash-flow

Now, the survivor finally meets with the widow who tells him she hired an attorney to advise her and she will leave the buyout to her, the one who “understands how these things work.”  Her attorney questions the ability of the accountant to value the business and his objectivity.  The attorney tells the widow that she would need a valuation prepared by an independent business appraiser that she could refer.  A comment here is that it would not be responsible for the attorney to advise her client without the valuation.  However, this is a costly and time-consuming process and the attorney says that she will also need to engage an accountant to audit the books or minimally, oversee the business to make sure funds are not being diverted.  She says, “It is my responsibility as your attorney.”  And you know what?  The attorney is right.

Meanwhile, whatever valuation amount is concluded, it will likely be much more than the survivor could manage.  So, the survivor will need to engage his own attorney and another appraiser to rebut the first one.  This process will drag on at least six months and likely longer.  Also, the relationship between the two families has deteriorated and they would no longer speak.  A twenty-year friendship is down the drain along with at least $25,000 of costs and a declining business with doubt as to its continuity.

It there was a buy-sell agreement, the price and terms would be clear, likely manageable and none of the time dealing with the attorneys and accountants would have been needed to be spent along with the extra fees.  Also, the time would have been devoted to keeping the business going.

Conclusion: If you and your partner are still living and are not disabled, it is not too late to get a buy-sell agreement.  Get one!  Two blogs to help you are at  and

P.S. If you do not get an agreement done, and if the unthinkable happens… then, this blog will become your story.

My next blog will offer a suggested buy-out plan where there is no agreement.

Top 10 Investing “Watch-Outs”

July 30, 2015
  1. Watch out for someone that recommends something that they cannot clearly explain so you fully understand it
  2. Watch out for taking greater risks than you need to
  3. Watch out for investments that do not bring you toward your goals
  4. Watch out for losses – they hurt more than gains help
  5. Watch out for the market tanking suddenly – it can – make sure you are protected
  6. Watch out for individual stocks tanking suddenly – they can – make sure you can absorb the loss
  7. Watch out for someone that says they can time the market for you – nobody can
  8. Watch out for spending more than you make – if you don’t reduce your spending or increase your income you will need to reduce your assets
  9. Watch out for falling into or remaining in stupid patterns
  10. Watch out for your assets or you could lose your ass – be organized

Types of Not-for-Profit Organizations

July 28, 2015

Tax exempt organizations are defined in IRC Code §501c.  Following, is a brief summary of the types of NFPs.  Common to all is that the organization cannot be organized for profit and no part of the net earnings can inure to the benefit of any private shareholder or individual.

Subsection (1) Instrumentals of the United States.

(2) Conduit or nominee corporations for an exempt organization under this section.

(3) This is the Section defining charitable organizations.  Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, litpaperchain-peopleerary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

(4) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

(5) Labor, agricultural or horticultural organizations.

(6) Business leagues, chambers of commerce, real-estate boards, boards of trade or certain professional athletic leagues.

(7) Clubs organized for pleasure, recreation and other non-profitable purposes, substantially all of the activities of which are for such purposes.

(8) Fraternal beneficiary societies, orders, or associations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents.

(9) Voluntary employees’ beneficiary associations providing for the payment of life, sick, accident or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual.

(10) Domestic fraternal societies, orders, or associations, operating under the lodge system where the net earnings of which are devoted exclusively to religious, charitable, scientific, literary, educational and fraternal purposes, and which do not provide for the payment of life, sick, accident or other benefits.

(11) Teachers’ retirement fund associations of a purely local character, if no part of their net earnings inures (other than through payment of retirement benefits) to the benefit of any private shareholder or individual, and the income consists solely of amounts received from public taxation, amounts received from assessments on the teaching salaries of members, and income in respect of investments.

(12) Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses.

(13) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose.

(14) Certain credit unions.

(15) through (29) Other entities not included here.

If you want further details you can check out the Internal Revenue Code Sections referenced above.

Social Security as an Asset Class

July 23, 2015

If you have ever worked in the United States or were married to someone who did, the chances are you will eventually receive Social Security benefits.  There are different ages when regular benefits can start beginning at age 62.  The longer the benefits are delayed, the greater they will be… until reaching age 70.

There are also many rules.  Payments on behalf of minor children are paid if a parent dies or attains age 65.  A married person can get benefits based on their spouse’s record if it will be greater than if based on their own account.  Benefits are reduced if taken before the full retirement age (age 66 and a few months) and are increased if you wait until your 70th birthday.

A spouse can take benefits at age 62 (based on their record), jump it up to half of their spouse’s when they attain their full retirement age but get no jump up beyond that point even though their spouse decides to wait until age 70 to get increased benefits.

Benefits stop at death, but a surviving spouse can then step in to get their deceased spouse’s benefits if greater than their own. There are also rules covering divorced spouses getting benefits based on their ex-spouse’s record and benefits paid to a disabled participant.

That being said, I suggest that Social Security also be treated as an asset class and benefits be taken as late as possible up until the 70th birthday. The return for waiting is an approximate 33% greater annual payout for the rest of your life.  That is a one-third ROI (return on investment) for waiting a little less than four years.  This pales any other form of investment.  And, the way Social Security is set up now, the payouts increase annually based on an inflation factor; and further, all payments are guaranteed.  As an asset class, this should be compared to your other investments.  Very few will provide this great of a return.

For those that do not need this money, waiting is a no-brainer.  For those that do, they should consider withdrawing needed funds from other asset categories they already have, even if they have to take early taxable withdrawals from retirement accounts and annuities or sell stocks.  The best would be to spend down cash and some fixed income investments where the tax bite would be minimal, if at all.  Work out the numbers and see for yourself.

Instead of looking at Social Security as a government entitlement that you want to get your hands on as quickly as you can, consider it an investment that will provide a far greater ROI by waiting than any other investment you have.  Social Security is an asset class!

There are many other Social Security strategies that should be followed up on.  The purpose of this article is to call attention to the potential of treating your benefits as an asset class.  Further information can be obtained from .

Mistakes Cost… And Can Kill

July 21, 2015

Annually, General Electric brings $3 to $4 billion to its bottom line by the savings generated by their Six Sigma error reduction program.  A couple of weeks ago, it was disclosed that a mistake in an arrest report led to a gun being issued to someone just convicted of murdering twelve people.  Mistakes are costly and can be deadly.

In business and not-for-profit organizations, mistakes cause countless dollars, wasted time, delays and universal dissatisfaction from bosses, employees, customers, beneficiaries and anyone else involved with the organizations.  Yet, much of the careless work is tolerated, often overlooked and even planned for.

Errors and mistakes will be made… we are human.  However, the successful organizations have these reduced to minimal amounts.  An organization’s culture needs to embrace an intolerance of errors with systems that include self-checking mechanisms providing the reliability of errors being caught by the person committing the careless action, and not left for later stages of review or quality control.

The importance of error-free work is obvious with the work done by air traffic controllers, but not so in less critical and stress-filled positions.  There will be occasional errors, but they do not have to be so pervasive that large quality control departments need to be established to catch these errors.

I feel that most errors can be eliminated with the proper message, mindset and insistence by organizations’ leaders.  So, I attribute wide spread errors as a failure of management.  The missive must be established that excellence is expected.  Pretty good is not acceptable.

Recently, after my car was serviced, I was asked by the service manager to respond to the survey I was going to receive that everything was excellent – the highest rating.  I was asked that if I felt otherwise about my experience, could I explain it so he could apologize and make sure it will not reoccur with the next customer.  He told me anything less than excellent was not satisfactory.  I was inspired by his great service and request that it be acknowledged in the survey; and then heard on the radio about the careless entry that led to the gun being issued.

For most organizations, it is unlikely people will die because of a mistake, but substantial parts of people’s lives will be lost to productive activity because of mistakes.  Widespread errors are a failure of management and the errors and those managers should have no place in most organizations.

Fixed Income Investing – What To Do

July 16, 2015

Here are some alternatives for fixed income investing and the types of people that invest in them.  Keep in mind, the range of interest rates, desire for cash flow and safety of principal.  All rates used here are estimates for illustration purposes.  This should be read in conjunction with my previous blogs on bonds.  If you want a single PDF file with all those blogs, send me an email request.  Also, any opinions are strictly mine and are for suggestive purposes and assume the principal will not be needed sooner than the indicated investment terms.  You are strongly directed to consult with your advisor before proceeding with any actions.

Keep in mind the primary criteria for fixed income investing is to get predicable interest and return of principal.  Fixed income investors should not expect growth in their principal, although many of these choices will have widely fluctuating values from the point of issue until maturity.  Further, many of these alternatives carry default risk.

Bank insured certificates of deposit – these are for people that desire guaranteed safety of their principal and interest.  The current rates range from 1% for one year to 2.25% for five years.   I would suggest the five year CD.

Fixed annuities – These are issued by insurance companies and are not insured as well as bank CDs, but carry certain state mandated guarantees making them relatively safe.  Terms generally extend beyond five years and can reach up to 20 years.  Rates are competitive with corporate bond rates for like terms.  The people considering these would be the CD investor wanting to lock in a longer term with higher rates.  Annuities have tax shelter features making them attractive to those currently in higher brackets that expect to be in much lower brackets when the withdrawals will occur.

U.S. Treasury Bonds – These are for people that want to anchor their portfolio with a guaranteed yield and return of principal at maturity.  The rates are lower than for corporates but for many investors the guarantee is more important that the yield.  These range from one month to thirty years.  Right now the rates are approximately 1.7% for 5 years, 2.9% for 20 year bonds.  These are absolutely default free if held to maturity, but are subject to market risk if they need to be sold beforehand.

Corporate Bonds – These are for investors that want the greater security of bonds over stocks.  The terms range from 1 year up to over 40 years.  As the term is extended the yields will increase.  To maximize returns a suggestion is to start a ladder with a 10-year maturity and do it annually or bi-annually for the next 10 or 20 years.   A suggested 10 year ladder starting in 10 years with A rated bonds will give you yields from 3% to 4.2% or an average of 3.6%.  If you want to start earlier or extend the period, work out the numbers similar to the way I did it in my Feb 25, 2014 blog.  This category would include foreign and so-called high yield bonds, but these are not recommended for the average investor, which this blog is directed to.

Municipal Bonds – Same discussion as corporates with lower rates, but usually greater after-tax yields when taking into account their tax free nature and the owner’s tax brackets.

Common stocks – these are not fixed income, carry no guarantee as to dividend or stability of principal, and are subject to the vagaries of the market as a whole and individual performance of the companies.  For a well-constructed diversified portfolio, the dividend payout measured in dollars will tend to rise over time as will the stock values.  As an example, the present yield on an S&P500 index fund is about 2% and 2.5% on a Dow Jones Industrial Average Index Fund.    It is possible to pick individual stocks paying higher dividends than these indexes, but then you are drifting away from what I view as a reasonable market risk.  In this category I will include higher yielding REITs and Business Development Companies.  This category is for people that are concerned about inflation and/or who are willing to, or need to, assume greater risk.

Preferred stocks – These pay a fixed dollar dividend, but there usually is no maturity date making the principal fluctuate based on the market and in some respects, making it behave similar to a bond fund.

Immediate annuities – These take your money in exchange for a guaranteed payout for the rest of your or your and your spouse’s lives.  Using this for a portion of your assets can increase overall yields without sacrificing risk.  The tradeoff is that your heirs will not get these funds, but you have to determine which is more important – secure cash flow for the rest of your life or a legacy for your heirs.

Other alternatives – There are more, but those covered here seem like the most common and most assessable choices.

Before deciding how to invest you must consider your needs and goals; attitude toward risk; portfolio size and potential to allocate smaller portions to higher risk choices; whether the interest will be accumulated for reinvestment or be withdrawn for current spending; the type of account the funds are in such as in the investor’s individual name, in a retirement account or annuity.

This is a lot to absorb, and I certainly could keep on going, but will stop for now.  Consider what I wrote and discuss with your investment advisor and decide on a sensible program based on your individual situation.

Barron’s Got Bond Funds Right… And, Wrong.

July 14, 2015

This week’s Barron’s cover story proclaiming, “Trouble Ahead for Bond Funds” is partly right and partly wrong.

The part of the sub-headline that says, “But, with interest rates likely to rise, investors could soon face losses” I agree with.  I disagree with the beginning of the sub-headline that says “Bond funds have long been prized for their income and stability.”  They have neither been a bastion for income or stability.  This is confirmed by the sub-headline in the cover of their special mutual fund section that says “Bond funds don’t offer much income, and their stability is less certain than ever.  Investors need a new approach.”  However, Barron’s approach in the article is not new and it contradicts the well-developed beginning which is an excellent analysis of the non-validity of bond funds as a secure portion of a portfolio.

The reality is that bond funds are not secure or stable.  They fluctuate widely.  Proponents of bond funds point to the great gains of such funds over recent years.  However, these gains were the result of falling rates which would be reversed if and when rates rise. Further, many fund managers chased these gains by loading up on Treasury Bonds that were poised to increase as rates fell.  However, the payouts were ridiculously low not even matching the low inflation rates.  Yet during this period their advertisements touted the great “total returns” – the combined increase in value plus the interest payout.

My contention is that the average investor, who is the typical target of the purveyors of bond funds, buys such funds expecting a steady cash flow and a predictable return of their investment.  They have been receiving neither.

Where I disagree with the article is when it suggests “a small allocation to an intermediate-term bond fund as ballast against big stock market losses.”  This advice is then justified as the potential for losses with this being less than the losses one might experience in the stock market.  The article also makes other suggestions indicating that in some circumstances some types of bond funds might be advisable and actually closes with mentions of bond funds to consider.  I totally disagree with this.  I don’t believe there is any situation bond funds should be owned by investors seeking stability of regular interest payments and principal.

I agree with the article that fixed income investors should buy individual bonds and should acquire a diversified quantity on some sort of laddered basis.

Investing for fixed income cash flow or interest accumulation is complicated, and in today’s low interest environment it is very difficult to know what to do.  I presented a plan with my reasons in my February 25 and 27, 2014 blogs, and the ideas are still valid.  For those still not sure what to do, read the Barron’s article, stay away from bond funds and think about your ultimate investment goals and how they might be achieved, and whether bond interest could do it for you.


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