Business Succession Planning

Here are a few reasons why you should consider succession planning. Use it to provide liquidity for yourself as a business owner, minimize the transfer of taxes whether by gift or by bequest in your will or trust. Also, you can provide continuity for your business so that your employees will not be left jobless. Last but not least, a great plan can help you provide fairly for your children and other family members down the road. Making sure the value of your business is maximized and being able to liquidate and generate cash flow to fund retirement is an important reason to establish a succession plan.

We can create a Succession Plan to meet all your business needs.

Planning for Estate Taxes: If your objective is to transfer ownership to your family member, a systematic plan of gifts and/or sale of stock in the family business from you to the successor family member over a period of years will benefit both generations. If no plan is in place and there is an unexpected death or disability, the value of the business and the ability of the successor family member to continue on successfully in the business may be drastically diminished. A business that has a high value may also be subject to the estate taxes. If your estate consists primarily of a family-owned business, you may want to retain the value and viability of your business to pass to the next generation but not be in danger of having to fire sale the business in order to pay the estate taxes.

Without proper planning, federal estate tax costs can create a substantial liability for your heirs. The best course of action is to have a succession plan in place that has already accounted for this contingency and that gives your loved ones the freedom to continue on and maintain the value of the business without having to fire sale the business. The use of life insurance and life insurance trusts can help provide liquidity for you as a business owner, in order to avoid forced sale of your business to pay the estate taxes. Another concern is the generation-skipping transfer tax to family members more than one generation removed, i.e., grandchildren. This is a tax in addition to the estate tax in certain circumstances.

Selling your business to a third party: If you have a business partner, we strongly recommended that you set up a “Buy-Sell Agreement” so that there is no confusion as to ownership interests and so that your loved ones are not forced into the court process to gain access to their inherited interest in the business. It is not uncommon for two or more business partners to have a Buy-Sell Agreement funded with life insurance and planning for the proceeds to be paid to a business owner’s spouse or the business owner’s revocable trust.

Transferring the Business to Employees through an Employee Stock Ownership Plan: This is a very flexible tool that uses corporate tax-deductible money to provide liquidity for shareholders, continuation of the business, raising working capital, and charitable giving. An ESOP is unlike any other employee benefit plan in that the ESOP Trust, or ESOT, is designed to hold primarily stock of the sponsoring employer.

Our plans are flexible enough to cater for the needs of everyone. Contact us today to learn more about a specific plan for your business.

Sales and Gifts to Family Members: A simple way to transfer your business to a family member is to use an intra-family loan. The benefit of using this strategy is that the minimum interest rates used between a lender and a borrower is set fairly low. Another way is to use an Installment Note sale to an Intentionally Defective Grantor Trust (IDGT) or to make annual gifts to that trust. We use these techniques to help improve your tax efficiency and to enhance your control in the transaction. A planning tool we use to help our clients is the Self-Cancelling Installment Note (SCIN). In general, a SCIN is used to sell an asset, typically shares, interests, assets in a family business, or an interest in real estate. It has been referred to as a cross between a private annuity and an installment sale, with many of the advantages of both.

Grantor Retained Annuity Trusts (GRATs): A GRAT may be a good option for owners who are expected to live at least for several years, want to keep most or all of the income from their business and where the business is anticipated to go up in value over time. In this type of arrangement, the owner retains an interest in the business before it is passed to the beneficiaries of the trust. This also allows for the transfer to be kept private and can protect the business against creditor claims.

At First Class Counsel, our goal is to provide the most powerful tools available for giving you and your business more control while eliminating, shifting or deferring taxes when doing a succession plan.