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Do you know what will happen to your company once you are gone? Unlike corporations, which are typically owned by stockholders, small businesses must plan for what happens after the owner or owners retires or passes away. These small businesses, typically organized as sole proprietorships, partnerships, or limited liability companies, must understand all considerations in business succession planning to fit it into their overall estate planning. Then, after consultation with a knowledgeable small business lawyer, the business owner or owners should utilize the most tax-friendly vehicle to implement those plans.
How Business Succession Plans Fits with Overall Estate Plans
First, it is important for any business to understand how their business succession plans fit into their larger estate plans. While most small businesses believe that business succession is a simple matter – where one person takes over the company after the current owner passes away, retires, or otherwise chooses to step away from his or her business – the truth is more nuanced.
In reality, problems can and often do arise at many stages of the business succession process. Heirs or employees of the business may feel unfairly passed over. Or, when there are multiple owners, some owners may not feel they were given sufficient input – and the ownership or operation of the business could be in peril when the succession process begins. In other circumstances, the person may die or become incapacitated unexpectedly, forcing the business to somehow operate without any succession plans – a recipe for chaos and reduced profits.
For these reasons, it is best to speak to an attorney and create a full, comprehensive business succession plan. By proactively responding to the different scenarios that may occur years down the road, the business owner will provide stability to the business during what will likely be a fraught time. Not only is this beneficial to the employees and other business owners, it also necessary to maintain customer loyalty.
Tax Considerations
After responding to the different possible scenarios that may occur down the road, the business owner should then speak to a tax or estate-planning attorney about the most tax-efficient way to implement his or her business succession plans. If ownership of the business transfers upon death, then the estate could possibly be large enough to be hit with “estate taxes” – currently, levied on estates over $11.2 million.
Popular ways to avoid the estate tax include establishing a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). These two trust funds are especially popular for rapidly-growing businesses, because once the business is put into one of these trusts, any growth in the business (and thus, the trust fund) will not be subject to estate taxes. These two types of trust funds also have the benefit or avoiding probate – an often lengthy and expensive affair, especially when large amounts of money are at stake.
Other popular tax vehicles utilized during business succession planning include a family limited partnership and a family limited liability company. Instead of utilizing a trust fund, these two business succession planning techniques organize the assets of a business under the ownership of another business, owned by a family. These types of funds are especially popular for business owners that want to pass the business along to their children. They differ from typical business forms because they do not allow the “owners” of the business entity to have any control over how the actual business operates. For this same reason, transferring assets from the company to the children may be tax-deductible as a gift, depending on several other factors.
Because business succession plans are so important, and the consequences for not effectively preparing so grave, any business owner should speak to a reputable and knowledgeable attorney about how to create the most comprehensive and tax-efficient business succession plans. Contact the Law Office of Carey Thompson today to arrange a session to go over the considerations in business succession planning.