Are you a business owner?  If you have an ownership interest in a business, you and I should discuss what will happen to the business when you are unable to participate due to disability or death. What if you want to retire but have most of your assets tied up in the business?  Owning a business without a well thought out and documented succession plan can result in your most valuable asset being wasted to the detriment of you and your family.
      Planning for and managing business succession is critical to the continuation of a business. You should consider short-term and long-term goals for yourself and the business.  The preferences of any co-owners and your family members should be determined. At a minimum, you will want to consider:
What needs to be done to provide me with a comfortable retirement yet allow the business to thrive?

  • If one of my children is interested in and capable of operating the business, how can I make that happen while maintaining fairness to the other children?
  • Who do I want to control the business when I am unwilling or unable?
  • When should transition to new control or ownership begin?
  • What needs to be done to lessen risk of a forced sale of business assets?
  • Are my employees or partners financially capable of buying me out?  If not, can that be fixed?
  • Can I eliminate or reduce the estate burden on my family resulting from the success of my business?
You and I can work together to implement a plan which addresses your specific situation.  Some of the strategies which may be implemented through your succession plan are:
  • A buy-sell agreement, which  allows  you  to  retain  control of  the business until your retirement, disability, or other specified event. When the event occurs, the buyer is obligated to buy from you or your estate at a price and on sale terms which have been prearranged.  Buy-sell agreements are often supported by life insurance so the buyer will have sufficient money to pay off your estate. The buyer can be a person, a group (such as co-owners), or the business itself.
  • A grantor retained annuity trust, which would hold the business and pay to you an income for a set period of time, with the business to pass to other trust beneficiaries at the end of the payment period or at your death, sometimes at a reduced value for gift tax or estate tax purposes.
  • A family limited partnership, which would facilitate transfer, over time, of limited partnership interests to family members while you retain control of operations as general partner. The value of the business operated as a family limited partnership may qualify for substantial discounts.  If so, use of a family limited partnership could result in a significant tax savings.
  • A  private annuity, which would be a transfer of the business in exchange for the buyer’s unsecured promise to make payments to you for the rest of your life. The business having been sold, it will no longer be included in your estate for estate tax purposes.
  • A  self-canceling  installment  note  (SCIN),  which  accomplishes  transfer  of the business to a buyer in exchange for a secured promissory note which provides that remaining payments are canceled at your death. The business will not be included in your estate for estate tax purposes.
  • An outright sale of the business, which would avoid gift or estate tax if the price is at fair market value, but may result in tax on capital gains if the sale is made while you are alive. The tax burden can be reduced or deferred by structuring the sale for payments to be received in installments. The income tax hit may be substantially more in a sale of business assets than in a sale of the company's stock. You should consult with me about the proposed terms of any contract of sale during the negotiations stage, not after the documents have been signed.           
      When the owner of a business becomes incapacitated or passes away, it is often necessary to shut down an otherwise healthy business. Proper business succession planning can help avoid many problems.  I encourage you to consult with me and allow me to assist you in getting a plan in place and, importantly, to prepare the legal documents to implement and carry out your plan. I have seen self-drafted plans fail. For most business owners, the succession plan is more than a business plan - it is your family’s future!
Wealth Counsel Advisor Forum Estate Planning