Passing Down the Family Business: Succession Planning Advice
Do you currently own a business that you intend to pass down to your children or other family members? Whether you’re looking to retire in the near future or you simply want to be sure that the wishes you have for your company are upheld after you’ve passed, there are proper steps to take. Though it may seem as simple as handing the keys to your kids or writing your requests in a will, there are a lot more details that need to be considered.
It would be a shame for all of your hard work to be wasted on legal issues, debt, or family troubles, but that’s exactly what happens to business owners who don’t plan in advance. Your company assets could be sold and divvied up to pay gift or estate taxes, income, and debts leaving your beneficiaries with nothing. Talking with an estate planning attorney is the most efficient solution to ensure you can pass down the family business without any issues.
Succession Planning: Why Do It?
At some point, every entrepreneur needs to consider what they’re going to do with their family business after they’ve retired, injured (to the point of disability or incapacity), or passed on. There are also other unforeseen life circumstances that could throw a monkey wrench in things like divorce. Having this plan in place gives you peace of mind in knowing that your business will continue after you’ve stepped down. It can also ensure you have some retirement income while also minimizing any familial disputes in the future.
A succession plan does more than provide peace of mind, income and reduce family drama. It also gives you the time you need to make the most efficient choice for the continued growth of your business. It allows you to maintain control until you’re ready to hand over the reins. Lastly, it helps you to establish a healthy retirement income while avoiding as many taxes and fees as possible.
Business Transfer Options
So, you know why it’s important to have a business succession plan, but what options do you have? There are several ways to effectively pass down the family business to your children or other members of the family. These methods, however, can be very complicated which is while it is ideal to work with an estate attorney to come to a resolution.
Sell the Business
If you’re thinking of retiring and would like to boost your income, one common option for transferring your family business would be to sell your interest in the company to your family members. Selling the company as opposed to giving it to them helps you to avoid gift taxes and also provides you with retirement income. You’ll need to have the business valued to determine it’s fair market value or worth.
Perhaps you’re planning for retirement years before you intend for it to happen. In this case, you aren’t ready to pass down the family business just yet. You can still determine who you’d like to take over for you and use a buy-sell agreement. This agreement essentially states that in the event of an unforeseen event like illness, disabilities, or death, (or once you’re ready to retire), the person you’ve chosen (successor) will need to buy their interest in the business.
In the event that you plan on running your business until you’re incapable or pass away, the best way to ensure your children get the business is to establish a living trust. The business will need to be set up in a trust. Then, you’d chose a successor trustee who you want to run the company after you’re gone. With this method, you would remain the trustee and beneficiary of the trust until your passing. That way you can run the business as you wish until it is passed down.
Many business owners are unaware of the legal and familial issues that could lie ahead in the event they want to retire or experience an unforeseen circumstance like divorce, serious injuries, long-term illnesses, or death. The best way to protect what you and your loved ones have worked so hard to build is to ensure that you have an iron-clad business succession plan established. Talk with a financial expert and estate planner to get started on making a smooth transition for passing down the family business.