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Integrating Business Succession Into Estate Planning

When many business owners talk about business strategy they often refer to financing, expansion, partnerships, marketing, and the like. However, many business owners fail to take into consideration the question of continuity and business succession. According to the U.S. Small Business Administration, over 70% of all small business owners do not have a business succession plan integrated into their other estate planning documents.

Why You Should Create A Plan Now

Many small businesses are family owned, and as a result they do not feel the need to be so formal with a succession plan. However, this can be a huge mistake and many businesses have crumbled after an owner dies or leaves because of the lack of a plan.

Another reason why business owners do not create a business succession plan is because, like writing other estate planning documents, the process makes them feel uncomfortable. Keep in mind that creating a plan is necessary to ensure that the business will continue in line with your goals. A succession plan can also protect your employees, their retirement plans, and your future, as well.

Creating the Plan

At a minimum, the business succession plan should include details about the transfer of management and ownership of the business. Management and ownership planning can include:

· Development, training, and support for successors · Delegation of responsibilities and authority to successors · Identification of outside advisors · Retention of key employees through compensation, benefits, etc.
· Coordination between who will own and who will manage the business · Consideration of transfer during the lifetime of the owner · Consideration of the best interests of the business and owner’s family
The last point is particularly important for the owners of small businesses. Many small business owners and successors have difficulty separating personal preferences and what is best for the business when creating a succession plan. You must treat the family business as what it is, a business, and if you need to speak with professional advisors about the succession plan then you should do so.

Benefits of Creating a Succession Plan

One benefit to creating a business succession plan is to avoid probate. All assets, including business assets, must go through probate and the courts unless arrangements are made beforehand. Another benefit to creating a business succession plan is to maximize potential tax considerations for your estate and your business.

Your business may continue to grow in between the time that you create a business succession plan and when you pass away. The taxable estate will include the increased value unless it is planned for accordingly. Options for avoiding probate and increasing tax benefits include an ILIT, GRAT, GRUT, family limited partnership, or family limited liability company.

An ILIT is an irrevocable life insurance trust that can provide liquidity for a business during probate. The funds from the life insurance trust do not pass through probate and are available immediately to help with the costs of business. The GRAT and GRUT are types of trusts that you can transfer the assets of the business into for successors while still maintaining a source of income for yourself. Any appreciation in business value is not subject to probate and is shielded from estate taxes. The final option is a family limited partnership or a family limited liability company. Using these in a succession plan can allow the owner to transfer business assets to the successor without probate and can even discount some assets for gift tax purposes.

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