A major consideration when contemplating succession planning is how it affects the business owner’s estate planning. This is important when either no family member desires to join the business or less than all children desire to join the business.
To ensure a fair and equitable distribution of business and family assets, these circumstances are where business succession planning and family estate planning need to intersect. Most business owners find these decisions difficult to address and, as a result, delay these decisions much longer that they should.
One of the most important factors is who will succeed the current owner and how management will be passed. This decision may include implementation of a plan during the owner’s lifetime as they withdraw or retire from the business, or it may be planning for an unexpected event such as death.
Implementing a succession plan into your estate planning can include a number of different tools, can be creative or simple, and can be immediate or over time. In most cases, where there is or will be more than one owner, a well-written and comprehensive Shareholder Agreement is the core of the plan. Succession plans also can utilize employment or consulting agreements, compensation plans and stock-option plans.
When deciding what is the best plan, the owner needs to consider his or her own financial needs, when they are comfortable giving up control and usually most importantly, the family dynamics in play. Loss of control is typically a major concern for business owners. However, there are a number of plans that include continuing voting control in the Shareholder Agreement and/or incorporate the creation of a class of non-voting stock to be transferred to the succeeding owners until a specified event or time.
Depending on the size of your business, your estate may be subject to federal or state estate tax. This will depend on the value of your gross estate, which includes all property owned at the time of death, less any allowable deductions.
The current federal estate tax system allows for $5,430,000 to be exempt from tax, thus allowing a married couple to pass $10,860,000 to their heirs tax free through the use of “portability.” The value of your business will likely be a key factor in determining the value of your estate.
If estate tax is an issue for you, the plan should include implementing structures that could reduce the value of your overall estate. In the business context, this may include the use of certain valuation discounts, such as those for the lack of marketability and/or lack of control, in structuring stock gifts and transfers to minimize expected estate tax liability.
If you are a business owner, it is important to determine whether you have appropriate plans in place in the event of an unexpected death, but it is equally important to assess whether you are prepared for an unexpected long-term disability or have a need for long-term nursing home care. This is especially true for a family business where children are embedded in the business and depend on it for their own livelihood but the parents are still the controlling owners.
A basic key component to estate planning is a Last Will and Testament. Contemplating one’s death is not an easy task, but for a business owner, it is a very important consideration. A will appoints someone to handle your final affairs after you pass away and dictates what happens to assets left in your name alone.
If you do not have a will, the state will dictate who receives your property in the event of your death. A will also allows you to name guardians for minor children, establish trusts to protect assets for younger children, beneficiaries with disabilities and address issues with blended or second families.
Trusts can also play an important role in succession planning if the owner would like to begin a plan but they have concerns about transferring ownership outright. Trusts are very useful because the creator or grantor doesn’t always have to give up control over the property and does not always have to give up income the trust property derives. Some types of trusts allow you to transfer property for asset protection purposes but still maintain a level of control, and others are useful for continuing management.
Trusts are also useful because they avoid probate and delays in transfer of control, which may affect the ongoing operation of the business. There are many forms of trusts that have differing benefits and accomplish differing goals. If you are considering the use of a trust, be certain you have been well-educated on all the risks and benefits and make informed decisions.
Life insurance always plays a role in a well-thought-out succession plan. Life insurance can be used to transfer a partner’s interest to another if one should die. It can be used to replace lost income for a deceased business owner’s spouse or to equalize distribution between children.
A challenge many business owners face is equalizing distribution of their estates between children who are involved in the business and those who are not. Life insurance is also useful if the business does not have cash readily available to settle the owner’s estate.
You worked hard to build your business. Having a well-thought-out succession plan is the key to passing that business on so it can continue to thrive in the years to come, and you can enjoy the fruits of your labor.
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