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Compassionate. Convenient. Comprehensive.

Your Business Needs Estate Planning, Too

| Oct 17, 2020 | Estate Planning |

You’ve certainly heard about estate planning for yourself. But if you own or have an interest in a business, did you know that your business needs estate planning too? It’s called succession planning and it shares some similarities with the individual estate plans – choosing people to act on your behalf, deciding who gets what, etc. – but these plans are directed at maintaining the company after you, its leader, have exited the business. The longevity of a small business depends on a well-thought-out succession plan.

For a family business, you’ll want to evaluate who else has the capacity and temperament to run the business and whether you have to look beyond family members as the business grows. If you do have to look beyond the family, how would you do that and what would you be looking for? You may not have to have an answer right away, but some indicators would be a good idea to put on paper.

An experienced attorney can help the key stakeholders create a succession plan or review an existing plan.

If you want to choose a successor, here is a basic how-to-guide to help you get started:

  1. Who is your successor? This is an important decision that shouldn’t be taken lightly. You should have an idea of who could fill this role at least 15 years before you expect to retire. Consider who within the business is most qualified to lead going forward. Get some professional guidance, especially if you have a family business, where emotions run high in transitions.
  2. What is your timeline? When do you want to retire? Do you want a gradual reduction of duties to allow your successor a phased-in training period, or do you want to hand things over all at once? Make sure you have a timeline established well in advance of when the control of the business will shift to the next person. Be flexible and open to your successor’s suggestions and ideas for the business during the transition – this will help you to still feel involved in the company’s future and also give your successor feedback and encouragement in what is likely to be a period of anxiety or intense emotion for them.
  3. What is your training plan? Your successor needs to know as much about the business as they can before they take the reins. Remember that they aren’t you – they will do things differently and process tasks differently, and that’s OK. But they may need more time to learn, and you have to let them experience all facets of the business, if they haven’t already. Define the main areas of the company, from the highest executive levels to the most basic tasks, and give your successor time to work in all of them. Work with your successor to strengthen his or her understanding in any areas of difficulty.
  4. What are your plans for retiring? Having your own retirement planning settled and a date selected is also crucial, not only for yourself, but for your successor and other members of the team. All need to have clarity about what comes next and when. Having a plan for your retirement will make succession much easier.
  5. Execute the plan and exit. When the time comes, step aside to allow the next leader to take over.

Other Choices for Succession Planning

Handing over company leadership to a successor is only one option. Here are some other ways to go about planning for the long-term success of your business after you exit:

Find a buyer. Sell your interest in the company. Bear in mind that you might have to pay capital gains tax. In addition, selling the business may be too difficult for you, especially if you built the business from the ground up. You may need to allow someone else to initiate the sale if that’s ultimately what needs to happen.

Transfer your interest by agreement. Consult with an attorney to draft a buy-sell agreement that plans for the sale of your interest in the business at a certain time. The buyer agrees to purchase your business interest at fair market value if and when the indicated event occurs, such as at death, when you retire, if you become disabled, or if you get divorced. 

Create a Family Limited Partnership for the business. It can be beneficial to create a Family Limited Partnership (FLP) and transfer a family business to it. An FLP is an entity owned by two or more family members that allows each member to buy shares of the business and to transfer assets between family members tax-free.

It includes both general and limited partners. General partners bear 100 percent of the liability and control all management and investment decisions, while limited partners don’t have full voting power and don’t share liability. When one family member is ready to leave the business, it’s easy to transfer it to another.

Set up a private annuity. This option allows you to transfer your business interest to a family member or other buyer in exchange for his or her agreement to make periodic payments to you for the rest of your life, or through the lifetime of a surviving spouse. A private annuity has the benefit of avoiding gift and estate taxes. 

Transfer your business interest to an irrevocable trust. If you create an irrevocable trust, such as a Grantor Retained Annuity Trust (GRAT) or a Grantor Retained Unitrust (GRUT), you can transfer your business interest into the trust while continuing to receive income for a defined period.

When the time period elapses or you die, your interest in the business goes to the beneficiary of the trust.

Talk to a qualified attorney to find out which option may be the best fit for your business.