Creating a Smart
Succession Plan
More than 40
percent of family businesses expect a change in top leadership in the next five
years, but 42 percent have not chosen a successor or lack a succession plan.¹
As a small-business owner, you've likely spent some time thinking about your own
succession plan. In order to develop a transfer strategy that meets your wishes
and fulfills the needs of your loved ones, consider three key steps: (1) choose
a successor, (2) reduce your exposure to estate taxes, and (3) find a way to
fund the transition.
1. Choose a successor—Though
it's tempting to leave everything to a family member, there may be a better
choice. Carefully weigh the individual's ability to keep the business
running...to move it forward. It may be a better choice to put an agreement in
place to sell the business to a partner and let your heirs use the money from
the sale to pursue other interests.²
2. Reduce exposure to estate taxes — In
2004, estate taxes could claim up to 48 percent of the gross value of your
estate Ñ including your share of the business. In most cases, these taxes are
due nine months after your death. This could make it necessary to dissolve or
sell your business simply to cover the tax bill. There are ways to reduce this
exposure using trusts, family limited partnerships, and other arrangements.³
3. Find a way to fund the transition —If
you set up an agreement to sell your share of your business to a partner, you
need a strategy to fund that agreement. Otherwise, your passing could put undue
strain on the business's finances. Many people find that a company-owned life
insurance policy is an ideal way to fund a buyout.
Like most entrepreneurs, you have probably spent a major portion of your life
building your business. With proper succession planning, your business can
provide a financial springboard for your loved ones even after you are gone.
1)
"The Business of Family Businesses," Smeal College of Business, Penn
State University, January 2004
2, 3) The use of these approaches can involve a complex web of tax rules and
regulations. You should consult an experienced estate planning professional
before implementing such strategies.
