Transition planning essential for all business owners

Joe E. Froehle is a financial consultant with Smith Barney.

Owners of privately held businesses are undoubtedly involved in every facet of it. As owner, you are the expert; you know everything there is to know about the intricacies of running and managing your business. Most importantly, it is your creativity and perseverance that have made you so successful.

But, at some point, whether by choice or by need, every business owner must ultimately exit the business. While there are a host of reasons for leaving, including retirement, disability and death, the one common need for yourself, your loved ones and your business partners is to plan for the transition of your business.

Planning for the eventuality of leaving your business is critical, as there are a host of issues that must be examined: income and transfer tax consequences, financial considerations, and determining the best way to transfer the management and ownership of your business to others. If you fail to address these issues, all your time, hard work and financial security may be in jeopardy.

Have you thought about who should manage or run your business and who should own it upon your departure? Do you have children who are qualified and desire to run the business? Will your surviving spouse have adequate income available should you die? Have you considered transfer taxes? Have you created or updated an estate plan to reflect the latest tax laws? Have you discussed your ideas with family members and business partners to try to ensure accord?

The number and complexity of questions surrounding business succession can be overwhelming. And, while it takes a good deal of work from financial, tax and legal advisors, proper succession planning can yield enormous benefits.

You need to apply an integrated strategy that could help reduce estate and gift taxes, generate retirement income, transfer the management and ownership of your business to others, and help you protect against financial losses.

A variety of the tools may be used in planning the successful transition of a business.

Life insurance can provide liquidity needed to pay estate taxes, buyout a co-owner's interest, attract or retain talented employees or replace the economic value of a key person.

Buy-sell agreements can help establish the business' value and ensure the orderly and efficient transfer of business interests when an owner leaves the company due to retirement, disability or death.

Lifetime gifts of business interests may be attractive if you expect your business to appreciate in value. If the gift is made during your lifetime, all post-gift appreciation should not be subject to gift taxes or includable in your estate.

Family limited partnerships and limited liability companies might be used to transfer a portion of your business to family members at a discounted gift tax value. These entities may help protect your family's wealth and reduce the size of your potential estate, while allowing you to retain managerial control over the business.

Private foundation gifts made during your lifetime qualify for charitable gift tax deductions, and possible income tax deductions, while gifts made at death qualify for charitable estate tax deductions.

Because no two businesses are alike, it's important to work with experienced professionals who can help you implement appropriate planning techniques tailored to your specific needs. For your protection, it is important to start planning today for the future you want to create.