If you own a closely held business, determining the best manner to transfer the ownership, either because of retirement or death, can be difficult. Whether you have a family-owned business where certain family members are more involved than others, or a closely held business with partners who are not family members, creating a plan to transition ownership is imperative for your financial well-being, family harmony and the ongoing success of your business.
Succession planning with family members. Proper succession planning for a family-owned business includes a written and implemented plan for who will run the business and who will own it, which may be two different answers. If you are transferring the business unequally to your children, you may want to specifically allocate the business to the appropriate child or children, and you may want to compensate your other children with non-company assets, such as cash, stocks or other property.
Succession planning may also include retirement options, such as transferring or selling the business operation prior to death, or continuing to own the business and renting or leasing the business to a family member to provide income to you and your spouse until death. Further, it includes choosing someone to run the company if you are incapacitated.
We strongly recommend that you have estate planning documents that work in conjunction with your succession planning documents. At a minimum, you should have a last will and testament, which provides for the distribution of your assets at death, and a financial power of attorney, which directs the person to whom you grant the power to manage and control your assets in the event of your incapacity.
More sophisticated estate planning may incorporate a revocable (or living) trust to avoid a probate proceeding at your death, irrevocable trusts, a limited liability company and/or a family limited partnership. If you already have these documents in place, make sure that your estate planning documents are reviewed from time to time to address any changes in state and federal law, your business and your family dynamic.
Succession planning when you own the business with a partner. If you own a business with other individuals, you should have frank discussions regarding what will happen if one of you wants to leave the business, becomes incapacitated or dies. You should have a plan for how the remaining partners will operate the business and whether the remaining partners will buy out your interest or continue to partner with new owners, such as the partner’s spouse and/or children.
Buy-sell agreements. Buy-sell agreements are quite common in joint business ownership. Having a buy-sell agreement can, among other things, limit a selling partner’s ability to sell to a third party without first offering the business interest to the other partners, or it can trigger a sale or purchase option in certain instances, such as retirement, death or incapacity. Life insurance can be used to provide liquidity for a surviving partner to purchase the deceased partner’s interest at death. The buy-sell agreement can also set the payment terms in advance to allow the business to remain viable.
Estate tax issues. Many people are familiar with the federal estate tax or the so-called death tax. The recent tax bill passed by Congress provides relief from the estate tax for individuals whose estates are valued at less than $11.18 million, or, if married with proper planning, $22.36 million. For estate tax purposes, an “estate” includes the value of all of your assets, including land, business, equipment, retirement accounts, life insurance and liquid investments. If you review your current assets and you are subject to the estate tax even with the increased exemption (which is scheduled to expire on Dec. 31, 2025, and revert to the pre-2018 exemption of $5 million, as adjusted for inflation), then you should include estate tax planning in your overall estate and succession planning as well.
A successful closely held business is usually the result of years of hard work and sacrifice by its owner. Properly preparing for each owner’s exit from the business, and the continued success of the business thereafter, should be an integral part of your ongoing business planning.
The information provided above is created by Sarah Cotton Patterson of Friday, Eldredge & Clark, LLP and was published in Arkansas Business on May 28, 2018. Sarah is a partner with Friday Eldredge & Clark and has practiced law for 17 years in the Trust & Estate Planning practice group. Her focus is on estate, trust and tax matters for individuals, as well as entity formation and business planning.
This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Trust and Estate Planning Attorneys.