If you're a small business owner, you may wish to keep the business in your family or sell it, before or after you die. Regardless of which option you choose, careful planning will ensure the business can stay up and running and be protected.
If your business has one or more co-owners, you might consider establishing a buy-sell agreement that says that upon the death of any owner, their interest is automatically purchased by the other owner(s). This arrangement can ensure that beneficiaries of the deceased owner (including spouses or other family members) don’t unintentionally become owners. Life insurance can be used or an irrevocable life insurance trust (ILIT) can be set up to cover these buy-sell agreements and provide necessary liquidity.
At a minimum, a business succession plan should address the transfer of the management and ownership of a business. Management succession planning may include:
* Development, training, and support of successors.
* Delegation of responsibility and authority to successors.
* Outside directors/advisors to bring objectivity to the process (when necessary).
* Maximizing retention of key employees through equitable compensation planning for management, family/non-family employees, and active/inactive shareholders.
Ownership transfer planning considerations may include:
* Coordination between who will own the business and who will manage the business.
* Consideration of the best interests of the business and the owner’s family.
* Timing of a transfer of the business during your lifetime. This may provide you with the opportunity to consult with the successor, and generally reduces the risk of a discounted sale of the business.
We use estate planning tools like ILITs, grantor retained annuity trusts (GRATs), and grantor retained unitrusts (GRUTs) to achieve liquidity, income, and tax planning goals for clients in their business succession plans. Another approach is the family limited partnership or a family limited liability company (FLP or FLLC). For example, you can form an LLC to hold the business assets. Some of the LLC units can be transferred to your family members, potentially eliminating the units from your taxable estate. Because LLC interests do not carry control of the business, the value of the transferred assets may be discounted for gift tax purposes. As with GRATs and GRUTs, FLPs and FLLCs are subject to complex rules and you should consult with experienced tax and estate planning professionals.
If you have questions about keeping your small business in the family as part of your estate plan, give us a call at 253.858.5434. We proudly serve clients throughout Washington and Idaho and are available to meet in person, by phone, or via Skype or FaceTime.