Passing a business along to the next generation is an admirable milestone but it requires many complex steps. There are many things to consider before starting the process, including a careful analysis of family dynamics, tax implications, and legal requirements.
Having the guidance and thorough knowledge of an experienced business law attorney is critical to a coherent succession plan. They can memorialize your strategic plan with legally sound documentation.
Planning and Implementing a Business Succession Strategy
A clear strategy is essential to any succession plan. Communicating clearly with the intended heir to the business is also critical. Things to discuss with your heir include:
- Do they want to run the business?
- Are they capable of running the business?
- Would hiring professional management be a better option?
- Is selling the business a better option?
The following is an outline of the process for passing your business to a family member.
1.The Importance of Early Succession Planning
Developing a succession plan starts with having an invested heir. Discuss the future direction of your business early and involve your heir in planning the transition of management and leadership.
2. Probing Your Heir’s Business Acumen
Make an honest evaluation of the skills and characteristics necessary to lead the business into the future. If the individual you have in mind to take over isn’t already involved in the business, they may benefit from a training and mentorship program within the company or from a nearby business college.
3. Professional Management and Business Continuity
Consider all of the elements necessary to prepare your business for new leadership, such as: defined responsibilities for the new leader, a timeline for passing the torch, and clear benchmarks to meet before, during, and after the transition.
Management and ownership may be transferred in phases with defined performance benchmarks to guide the transition.
4. Illinois Taxes and Legal Considerations
Consult a business tax specialist to determine how estate taxes should be handled: will the business ownership be considered a gift, or are there alternative ways to transfer it that are a better fit? Federal tax law allows up to $15 million to be gifted (at the time of the owner’s death) without incurring estate tax, but the threshold for Illinois estate tax is $4 million.
Coordinating estate and business planning can reduce probate costs and minimize the risk that heirs must sell business interests to pay estate taxes.
5. Facilitating Business Transfer Through Tools and Structure
Strategies for transferring a business with reduced tax exposure include:
- Lifetime gifting, which gradually transitions ownership over time to reduce exposure to estate taxes.
- Trusts, which can allow the business founder to retain some control of the asset while minimizing estate taxes and probate exposure.
- Creating Family Limited Partnerships or LLCs, which are business entities that allow ownership transfers over time while discounting valuation used to calculate taxes.
- Buy-Sell Agreements are strategic tools for transferring ownership over time with formal terms and structure that can reduce the likelihood of disputes.
6. Promoting Fairness in Inheritances
Training one child to take over a business is fine as long as the inheritances of others are adjusted accordingly. A business and estate planning attorney can examine your holdings and suggest ways to balance the value of inheritances equitably, such as with life insurance policies. Openly discussing these options and decisions is recommended as a way to reduce opportunities for disputes over the estate.
A Business Works Better Through Planning
There are many options for leaving a business to your children, a wonderful legacy for the entire family. A professional business attorney from Legacy & Life Law can help develop your strategy and follow through with the step-by-step plans required to make a smooth transition to new ownership happen. Call for a consultation today.