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Business Owners Need an Estate Plan and a Succession Plan

Business Owner Succession Planning
If you own a business, you’ve always got plenty to think about: sales, marketing, employees, competition, industry trends and consumer preferences. The list goes on and on.

Business owners get so caught up in working in their business that they don’t take the time to consider their future, or that of the business. Many business owners insist they’ll never retire, but that time does eventually come. The question The Gardner News asks of business owners is this: “Do you have a business succession strategy?”  In the absence of such a strategy, the business’ assets, the owner’s family’s future, and the business itself could be in jeopardy.  Therefore, business owners need an estate plan and a succession plan.  Both are critical to meeting the planning needs of a private business owner.

Developing such a plan should begin long before retirement is on the horizon. It may take a long time for an owner to decide what he or she wants to do as far as business succession is concerned. A business owner could sell the business to a family member, an outsider, a key employee or to all the employees. The plan could be implemented while the business owner is still alive and well and working, or it could be set up to take effect, only after the owner passes.

The decision of how to handle a succession plan needs to be made with a number of issues in mind: family dynamics and interest in the business (or lack of interest), the nature of the business, the success of the business and the owner’s overall financial situation.

Here are a few of the more popular strategies:

Selling the business outright. There are business owners who don’t need the money and feel that no one else will care as much as they do about their business. Therefore, they sell it. There needs to be a lot of planning to minimize tax liability, when this is the choice.

Using a buy-sell arrangement to transfer the business. This can be structured in whatever way works best for both parties. It allows a slower transition to new ownership. Some families use the proceeds of a life insurance policy to fund the buy-sell agreement, so family owners could use the death benefit to buy the owner’s stake.  This is often useful when a business is valuable, but the surviving family doesn’t have a great deal of liquid wealth to fund a purchase.

Buying a private annuity. This permits the owner to transfer the business to family members, or someone else, who then makes payments to the owner for the rest of their life, or maybe their life and another person, like a surviving spouse. It has the potential to provide a lifetime stream of income and removes assets from the owner’s estate, without triggering gift or estate taxes.

The plan for succession needs to align with the business owner’s estate plan. This is something that many estate planning attorneys who work with business owners have experience with. They can help facilitate the succession planning process. Talk with your estate planning attorney when you have your regular meeting to review your estate plan about what the future holds for your business.

Reference: The Gardener News (June 4, 2019) “Do you have a business succession strategy?”


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