Succession planning advantages well worth effort

Most people work hard for their money. Business owners, in particular, put a lot of blood, sweat and tears into establishing and maintaining successful, profitable businesses during their lifetime.

Despite the fact that "nothing in life is certain except death and taxes," planning for the continuation of a business following the owner's death is an opportunity often overlooked by the business owner.

Business succession planning is the process of providing for the transfer of control and ownership of a business un-der various circumstances, including the death of the owner.

When such planning is integrated with a properly drafted estate plan, a business owner can document how he wants his business to operate after his death.

Statistics show that only 35 percent of family businesses successfully pass to the next generation. Such a low percentage emphasizes the importance of business succession planning.

Requirements

Business succession planning requires much time and careful thought. In fact, there are several aspects involved in the planning.

One such aspect is personal considerations. Obviously, the business owner must first decide whether he wants his business to continue operating following his death.

Then the owner must decide who he wants to run the business. Are his children capable of operating the business? Do they have the necessary experience and knowledge to run a business?

Are the children even interested in running a family business? Do the two generations have the same goals for the business? Are potential conflicts inadvertently going to arise between family members? Many thorough discussions among family members will be necessary to determine the answers to these questions.

Cash flow

Another aspect of business succession planning is operational considerations. The business must have the financial capability to continue operations following the death of the owner. A lack of cash flow can result in a forced liquidation of business assets in order to pay any expenses and estate taxes following the owner's death.

Key-man life insurance or an irrevocable life insurance trust are two vehicles that can provide this needed cash flow. A possible drawback, however, to key-man life insurance is that the proceeds are paid without any guidance as to how the proceeds should be used. An irrevocable life insurance trust can resolve this issue. Not only are the insurance proceeds immediately available following the owner's death, but the owner, through the terms of the trust, directs how the proceeds are to be used.

Tax issues

A third aspect of business succession planning is technical considerations. For example, the plan should provide for minimization of the various taxes that may result from the succession. Estates can be taxed at a rate as high as 50 percent, so a thorough assessment should be made of the effects of estate and transfer taxes.

Family limited partnerships, employee stock ownership programs, buy-sell agreements, estate freezes and corporate recapitalizations and gifting programs utilizing the gift tax annual exclusion are vehicles that can be used to minimize taxes as well as provide for the continuation of a business following the owner's death.

Documentation

The final aspect is to have the necessary documents to implement the business succession plan.

Such documents can be drafted in conjunction with the business owner's estate plan.

In addition, it is very important to keep the documents and the business succession plan current. The business owner should periodically assess his situation to determine if any revisions or updates are necessary.

With business succession planning, the likelihood that a business survives to the next generation is greatly enhanced. Business succession planning is no simple task; however, the reality that one's life work can be carried on beyond death is a reward that is well worth the time and effort spent developing the plan.

(Douglas A. Carter is an associate at Lowther Johnson, Attorneys at Law LLC. His areas of practice include taxation, estate planning and corporate law.)