Estate planning for the business owner

There are more than 10 million small business owners in America. Seventy percent of family-owned businesses fail shortly after the transition to the next generation, often as a result of family discord, taxes, lack of liquidity or inexperienced management.

A good business succession plan as part of a comprehensive estate plan is critical to help ensure future success for everyone whose efforts have helped the business grow. It emphasizes the owner's commitment to the business's long-term growth and instills confidence with family members and key employees.

A plan that will succeed requires a great deal of careful thought. First, obtaining an accurate valuation of the business is critical in identifying and assessing potential tax and liquidity issues. Next, are family members involved in the business? Remember that ownership succession is not management succession and they need to be considered independently. Some other key issues the owner must consider include: a) timing of planned succession – at retirement or at death; b) method of ownership transfer; c) payment for the owner's interest; d) partners and/or family members as managers; and e) minimizing and paying capital gains and gift and estate taxes.

Start early. Developing an effective succession plan is a multi-phase process and each plan is unique. For example, the owner may need a formal Buy-Sell Agreement that prearranges the sale of the business interests to existing partners, key managers or others. Alternatively, a family limited partnership or limited liability company can assist in transferring the owner's business interest to family members. The use of succession planning tools such as grantor retained annuity trust, a sale to an intentionally defective grantor trust or sale in exchange for a self-canceling installment note may also be effective in reducing the value of the business for estate tax or gift tax purposes.

The best plans involve the counsel of independent professionals including financial planners, accountants, bankers and your attorney. The more time you allow yourself for thoughtful planning and implementation, the greater the probability of achieving the outcome you seek for the business and for your family.

Christopher Paul is an attorney in the Trust and Estates Department at the McLane Law Firm. He can be reached at 603-628-1335 or christopher.paul@mclane.com.