DLO / Friday, October 1, 2010 / Categories: Springfield Business Journal Article, Blog Post Leaving Your Business Behind In the last few months, we have discussed forming and running your business. We will now focus on the end of your participation business. If you own your own business, whether alone or with others, you must have a succession plan. What is a “succession plan” and how do you get one? The first step in creating a succession plan can be the most difficult, and, unfortunately, can cause business owners to avoid the process altogether. You must decide what you want to happen to your business in the event of your death, disability or retirement. Threshold questions are: (1) Who should own the business? (2) Who should run the business? (3) How should the new owners acquire the business, e.g., gift, purchase or both? Answers to these questions can be very difficult and will likely change over time. If you are married, you may want your spouse to receive the business at your death. If you have partners, are they willing to be partners with your spouse? What if your spouse dies or becomes disabled before you do? You may want one or more of your children to take over the business. Again, if you have partners, is that acceptable to them? Are your children old enough to run the business now, or would someone else need to run it until they are older or have graduated from school? Is only one of your children in the business? If so, should she receive the entire business or should the others receive a share as well? Should the child in the business purchase the business or should you leave it to her in your will? Once you have spent some time thinking about these issues, you should consult your advisors, usually your CPA and attorney. They can advise you of options to reach your goals and of traps you will encounter such as income tax problems and estate taxes. After you have formulated your plan, you will need documents to implement the plan. The documents you need will depend on your choices and your business. Any documents your attorney prepares should have as much flexibility as possible going forward. Circumstances change in ways none of us can predict. You do not want to be locked into a plan that no longer reflects your wishes. If you have a small business that you want to give to you family and your estate will not be taxable (there is no estate tax through the end of 2010, but the exemption will return to $1,000,000 per person on January 1, 2011), your succession plan may only consist of a power of attorney and will and/or trust agreement. Your will or trust agreement will direct who receives the business at your death. Your power of attorney will allow someone to operate the business if you become incapacitated. If your estate will be taxable, there are many options that can be used to reduce the estate tax or provide for its payment. One way to provide for the payment of estate taxes is to purchase life insurance. Although life insurance is generally not subject to income tax, it is subject to estate tax if the insured owns or controls the policy. A common way to solve this problem is the use of a life insurance trust. If the insured (the business owner) is not a beneficiary of the trust and has no control over the trust, the life insurance proceeds will not be taxed as part of his estate at his death. Upon the owner’s death, the trust can lend the proceeds to the estate to pay the tax or the trust can purchase assets from the estate (including a share of the business) to give the estate the funds needed to pay estate taxes. Other steps can also be taken to reduce the estate tax burden. The owner can give some of the business to his children (or trusts for their benefit) during his lifetime. Each person can give any other person $13,000 per year without gift tax consequences. Husband and wife can each make gifts or can elect to split their gifts. Therefore, mom and dad can give each child (or certain types of trusts for the child) up to $26,000 per year gift tax free. Even if ths $26,000 amount only covers transferring one share to each child, over time these gifts can significantly reduce estate taxes. Giving shares away now also removes future appreciation from your estate. For example, if you give your child twenty-six shares today which are worth $26,000 and at your death twenty-six shares are worth $52,000, you have removed $52,000 from your taxable estate. There are many more estate planning opportunities that can reduce taxes, however, they are beyond the scope of this article. If you are not the sole owner of the business and do not want to transfer your share of the business to your family at your death or the other owners do not want you to do so, then you will need a buy-sell agreement. A buy-sell agreement generally provides that in the event of an owner’s death, disability or retirement, the other owners or the business will buy your shares. The terms of a buy-sell agreement will differ for every business, but key points are (1) What triggers the buy-sell agreement? If you have a stroke but are only temporarily incapacitated, should it be triggered? (2) What will the purchase price be? Fair market value? Determined with or without minority discounts? Book value? (3) How will the purchase price be paid? All at once? Over time? (4) How will the purchase price be funded? Life insurance? Will the business own the insurance or will each owner own policies on the other owners? Answers to these questions will depend on your preferences as well as tax considerations. The answers may be different for a C corporation, an S corporation and a limited liability company. However, once you have determined what you want to happen with the business, your advisors can almost always give you the structure you need to make sure that happens. by Sarah Delano Pavlik Previous Article Protecting Your Brand Next Article Monitoring Employee Communications Print 17663