Lessons Learned from Pop Culture TV Shows, Landman & Succession about the Need for Liquidity Planning

3 days ago

4 min read

By Lee Conti, Jr., Partner, CPS Private Client Solutions

Matthew Gandy, ChFC®, CLU®, Partner, CPS Private Client Solutions

The Need for Liquidity Planning

Anyone advising wealthy families has likely seen some version of this: the founder passes away, the business is worth eight or nine figures, and yet there is not enough cash available to pay taxes, buy out other family members, pay off bank loans, or meet payroll. This can be especially difficult for a family to navigate while grieving.

In Landman, M-Tex Oil depends heavily on founder Monty Miller’s relationships and authority. As his health begins to fail, the business faces the challenge of who will make decisions, maintain partner relationships, pay creditors, and ward off competitors. The business is worth millions; the plan behind it is worth little.

Succession illustrates the other side of the coin. Logan Roy spent years dangling the carrot of succession in front of his children, only for the family to face a boardroom power struggle and a hostile takeover bid. His succession planning seemed to depend heavily on his personality and control – neither of which can outlive him or, by itself, create generational wealth. Strip away the drama of the TV show, and we are left with a familiar problem for successful families: much of their wealth is tied up in a business, with insufficient cash available to fund a transition. The documents create obligations, but liquidity helps meet those obligations.

Solution One: Have a Funded Key Person Life Insurance Policy

The proceeds from key person insurance are intended to be used as “triage capital”. In other words, the coverage can be purchased prior to the actual need for it and is then used when the need arises. The business is typically the policyowner and premium payer. Death benefits are generally received tax-free by the business if the IRC §101(j) notice-and-consent forms are completed prior to the policy being issued.

A key person in a family enterprise is not necessarily the founder of the business. It could be the person with whom most clients work on a day-to-day basis. It could be the principal who has guaranteed the business’s credit line. It could also be the operator who holds a license required for the business to operate.

The proceeds do four jobs at once:

Bridge revenue as clients reassess. Relationship practices often lose 30–60% of revenue within a year.
Protect lenders. A key person’s death can trigger an adverse change clause in a loan agreement, allowing the bank to call the loan.
Fund replacement. Recruiting, search fees, and the time needed to replace an executive can easily exceed $1 million.
Stabilize value. The loss of a founder or other key person can reduce enterprise value by 20-40% (or more), at least in the short term.

Having too little key person coverage in place is a common error. Consider analyzing the need in at least four ways: EBITDA or earnings impact, guaranteed debt, potential revenue decline, and replacement cost. Then use the highest figure as the minimum needed for Key Person coverage.

Solution Two: Put Money Behind the Buy-Sell

These agreements specify what happens to an owner’s interest in the business if the owner dies, becomes disabled, retires, or gets divorced. Without funding, surviving owners or the business may have to come up with cash to buy out the deceased owner’s interest, potentially using business cash, personal savings, or borrowed funds.

Getting the structure right matters just as much:

Cross-purchase, entity-purchase, wait-and-see (hybrid), and special-purpose buy-sell insurance LLC structures each have a place, and the benefits and trade-offs of each should be carefully considered. In a cross-purchase arrangement, surviving owners buy the departing owner’s interest and receive a stepped-up basis. A redemption is often simpler to administer but generally does not give a basis increase. A hybrid arrangement can provide flexibility to defer certain choices until an owner’s death. For larger groups, an insurance LLC preserves the basis benefit without requiring multiple policies

Valuation. Fixed prices can become outdated quickly within 18-24 months. Under IRC §2703, a below-market price will not bind the IRS. Best practice is to use a formula with a floor, reviewed annually, and with coverage sized to the upper-end value.
Disability. Make sure the disability buyout policy’s definition of disability aligns with the agreement’s buyout trigger. Otherwise, a buyout obligation could arise without sufficient insurance proceeds or cash being available to fund it.
Transfer-for-value. Transferring existing policies among corporate shareholders can make the death benefit taxable, so carefully analyze it before any restructuring.

Liquidity Is the Plan

Logan Roy intended to create a dynasty for his children and ended up having a bidding war for the company that he built. Monty Miller built a successful, relationship-driven business in which clients dealt with him directly. When his health began to fail, the business faced a leadership vacuum. The lesson here is that neither man lacked wealth, but they lacked cash. The real test for a family and its advisors is not simply the documents they create, but whether those documents are properly funded and whether any life insurance is appropriately structured and sized for the business’s current needs.

Sources

Internal Revenue Code §101(a) (general exclusion for life insurance death benefits), §101(a)(2) (transfer-for-value rule), §101(j) (employer-owned life insurance requirements), and §2703 (certain buy-sell agreements and restrictions disregarded for estate and gift tax valuation purposes unless statutory requirements are met).
CPS Private Client Solutions, The Business of Family: Estate Planning & Succession Through the Lens of Pop Culture (practitioner's guide and seminar workbook), Chapters 1, 2, 7, 8, and 13.
Landman (Paramount+) and Succession (HBO), as referenced series.

This material is educational in nature and is not intended to provide legal or tax advice. You should consult your own legal and tax advisors regarding your specific circumstances.