Planning for Succession
Success has always required a disciplined approach, including the discipline to plan each big step before it is time to take the big step. The same discipline should be applied in succession planning. Selling your business of course requires careful planning because it is complicated, with many steps and requirements involved. The more complex it is, the more more well planned it needs to be. Discipline yourself to do appropriate amounts of succession planning covering all aspects of succession. Careful planning is especially valuable if done consistently. Whether you are thinking you may keep the business for a long time, or want to sell the business sooner, succession may happen unexpectedly, so it is best to have a plan and update it consistently, and the sooner you make plans, the better prepared you will be thereafter. In order to succeed to your maximum extent, your succession planning should be extensive and begin early. It takes years to properly prepare for succession. Although succession might seem like only a distant future possibility, being truly well prepared for succession to happen is at least a couple of years in the future as well. Succession will be difficult to prepare for even were you to have an unlimited amount of time to prepare.
Business owners need to consider, among other things, who will succeed them as owners. There are big tax and logistical implications–the costs–probate and the estate tax burden–and the risk that a financial future could weigh in the balance. Estate planning is not only a necessity, if is a unique opportunity to accomplish so many goals-
Enhance the long-term value of the business;
Enhance the value received by your survivors;
Reduce the tax burden;
Avoid being in business with strangers who possibly are unsuitable;
Avoid strangers managing, operating or controlling your business;
Avoid delays and costs;
Retain key employees; and
Ease the other challenges to successful succession.
A lack of proper estate planning by a business owner can financially jeopardize the business owner’s then-living family.
The estate tax creates particular problems for both businesses and families–the business often constitutes a large percentage of the deceased owner’s net worth. The estate tax is a very high percentage of a large estate, and when that happens to be the case, insufficient liquidity is a debilitating hardship. Without proper planning, the estate tax is devastating, and the business and the family members who survive may be forced to sell the business at the worst possible time. A forced sale should be avoided through proper planning.
There are often tax advantages in making lifetime transfers. Gifting interests in your business during your lifetime allows you to avoid estate tax on the transferred interest itself and any appreciation n value that occurs after the gift. There are several ways to make lifetime transfers of ownership interests.
A business interest can be held in trust. This arrangement can serve both non-tax and tax objectives. A living trust can designate who inherits your assets and is preferable to a will. Living trusts have an advantage over wills because, if ownership of your business is titled in the name of the trust, they allow an individual’s estate to avoid probate. Probate is time-consuming and costly. If you die without a will or trust, the intestacy laws will dictate which of your relatives would succeed to all your assets—not necessarily the persons you would have chosen to own and operate your business. A living trust allows you to designate a trustee who will be responsible for managing the trust assets upon your death or incapacity. It may be desirable to name a special trustee to manage the business interest.