Estate Planning Blog Articles

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How Do You Plan a Business Succession?

When business owners die without estate or succession plans, chaos ensues as family members clash over leadership decisions and determining the direction of the business. Even the closest families can quickly descend into a battlefield of hurt feelings, endless arguments and faction-building, according to the article “How to Make Your Business Outlive You” from next avenue.

Family disagreements often escalate into legal disputes. Lacking leadership, businesses spiral downward and often must be liquidated, leaving behind broken families with severely depleted assets.

This scenario occurs in small businesses on a regular basis. Owners with the vision and tenacity to take their ideas and create a successful enterprise are often so passionate that they can’t imagine the business without them.

A well-defined succession plan matters to more than just the family and their customers. According to the Small Business Association, businesses with less than 500 employees account for 99.9% of all firms in the U.S., 43.5% of the country’s total economic output, and just under 66% of new jobs created. A well-designed succession plan contributes to the national economy,

Having a succession plan in place protects the business and the family from unforeseen circumstances and creates a roadmap for the future. What is the best time to start? When all is well, leaders are healthy and there’s no internal drama.

Start by contemplating your legacy. How do you want your family and employees to benefit from the value created by the business? Clarifying this will drive much of what follows.

Seek professional guidance. An estate planning attorney should be one of several professionals to ensure that the plan complies with laws and regulations in your jurisdiction. You also want to be sure your business succession plan aligns with your estate plan. Otherwise, the resulting confusion could lead to prolonged difficulties and even litigation.

You’ll need a power of attorney for someone to be able to make decisions if the business owner becomes incapacitated. A buy-sell agreement establishes a fair market value for the company. Life and disability insurance policies provide financial security for the owner and key personnel.

Put it in legally enforceable documents. Discussions only go so far. Executing a formal series of documents ensures that the plan will be enforceable by a court if needed. Language should be clear, with no ambiguity, to transfer ownership and business shares.

Potential successors need to be identified. Will everyone step up to the next level if the business owner becomes incapacitated or dies? This isn’t always the best solution. Sometimes, skills override structure.

Reviewing and updating the business plan should be done as often as you update an estate plan. Whenever there is a major event in the business, review the plan to see if it is still relevant.

A succession plan is all about legacy, continuity, safeguarding a business, letting employees know they are valued and reducing volatility in the family’s future. It allows the business owner to communicate their values and vision, even if they are not present to be part of the future.

Reference: next avenue (Dec. 12, 2023) “How to Make Your Business Outlive You”

How Can I Successfully Transfer My Business to My Children?

According to ITR Economics, out of the 77 million Baby Boomers in the U.S., an estimated 12 million are privately held business owners.

As ownership of businesses for those born between 1946-1964 is transferred to the next generation, an estimated $10 trillion worth of business assets is expected to be transferred in the coming years.

AZ Big Media’s recent article, “Passing the torch: Considerations for a successful generational business transfer,” explains the best way to have a successful business transfer.

Develop a Strategic Plan.  A successful generational business transfer takes time and planning. You should begin the planning process way in advance of the change in leadership. This can give a family time to define what the future of the company looks like. Determine what technology, human resources, and capital requirements the company needs to be successful in the short and long term. Ensure that the current and future owner’s visions are communicated. If both visions aren’t in alignment, discuss what the future for the business may look like. Balancing long-standing business practices with new changes can mean a sustainable and successful business. Begin integrating the future leader into day-to-day business operations before transitioning. Establishing a clear transfer of duties and mapping out a timeline can help with a smooth transfer process.

Get Finances in Order. Preparing business finances in advance of a generational transfer is critical. The current business owner may consider setting up a grantor-retained annuity trust for their successor. An experienced estate planning attorney can help to create this trust, which earns annual income for the beneficiary receiving the funds with minimal or no gift tax liability upon expiration. Family members may also consider transferring their business to the successor through an installment sale, which is a sale of property where at least one payment is received after the tax year in which the sale occurs. Note that an installment sale could mean a tax benefit for the seller because the overall tax liability is spread out over time rather than all at once during the business transfer. Once you decide on the preferred financial path to conduct the transfer, look at the company’s cash flow and other financial projections. List the projected expenses, liabilities and potential taxes owed, and then identify sources of liquidity to pay them.

Work With Financial Partners. If not already in place, look to assemble a team of trusted advisors, including a CPA, attorney, banker, and wealth advisor. This team can work through the financial aspects of any generational business transfer.

Transferring a business is a major family event involving potentially tough conversations and decisions. This can be a complex process. However, with proper planning, it also has the potential to be an opportunity to achieve new growth and elevate long-standing family business goals.

Reference: AZ Big Media (June 8, 2023) “Passing the torch: Considerations for a successful generational business transfer”

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