An often overlooked aspect of family businesses is planning for transition to the next generation. It is understandable that making time to plan for the future is difficult. It is critical that business owners take time to plan for this transition. Owners should put together a formal succession plan long before the transition will take place. Here are some things to consider when thinking about a succession plan to the next generation:

  • Does the owner want to transition the business to family members?

Before considering how to transition the business to the next generation, the owner should first think about whether it makes sense to do so. Are the children involved in the business? If not, will they be in the future? Do they have the skills necessary to carry the business forward successfully? If there is more than one child, will they be able to work together? How will ownership and management duties be split amongst siblings? Answers to these questions should be carefully considered before moving ahead with a succession plan.

  • Will the owner be able to step away from the business and allow the next generation to take over operations independently?

Successful business owners don’t get that way by accident. They have created a business that has thrived through hard work, determination, and discipline. A good succession plan will provide for specific dates of transition and there should be a cutoff date for the owner to completely relinquish control of the business to the successors. This can be a very difficult process for an owner who is used to being in control and running the business a certain way.

  • Retirement and estate planning needs:

It is important to have a financial plan for the owner’s retirement. This will depend on several factors including the owner’s age, health, lifestyle, and financial status independent of the business. If the owner is set financially and does not need any more money out of the business, then traditional gifting strategies may make sense. However, if the owner is relying on a capital event at retirement, there may have to be a plan in place for the next generation to buy out the owner’s interest.

  • Estate and gift tax planning:

There are many different strategies to minimize taxes upon the transfer of a business to the next generation. Through effective tax planning, owners can establish a lifetime gifting plan in order to transfer a portion of the business to their children each year without triggering any gift tax. The Internal Revenue Code permits taxpayers to transfer assets worth up to $14,000 ($28,000 if done by a married couple) each year without triggering any gift tax or reducing the taxpayer’s lifetime estate tax exclusion. In the event the business is not completely transferred by the time of the owner’s death, the owner will be able to transfer up to $5.43 million in assets without triggering any estate tax. If the owner expects the transfer of the business to be worth more than the lifetime exclusion at the time of their death, a life insurance policy can be put in place that will cover any estate tax so the next generation will not be forced to sell company assets to cover a large estate tax bill.

Business succession takes a lot of forethought and planning, especially when family members are involved. It is important for business owners to meet with their advisory team and put together a plan for the future that will ensure the continuity and preservation of their business and provide wealth for multiple generations to come. If you have any questions about your succession plan, please contact your LSL Advisor at 714.569.1000.

By: Jon Huckabay, CPA


LSL Staff

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