Most people know that they should include their businesses in their estate plans. However, some do not know that business succession planning is also necessary. Succession planning is even more crucial if you want to protect your business. Otherwise, your business's value might plummet after your demise or incapacitation.
Below are some of the measures you can take to plan for your demise or incapacitation.
Sell the Business Outright
One option is to sell the business. You can sell the business to:
- The company's employees
- Your beneficiaries
- Other third parties
Your beneficiaries can then divide the proceeds of the sale according to your estate plan.
If none of your beneficiaries wants to take over the business operations, you can sell the business. This option also makes sense if you don't have faith in your beneficiaries' ability to manage the business.
The sale of the business can take multiple forms. For example, you can sell the business in its entirety, or you can dissolve the business and liquidate its assets.
Separate Ownership and Management
You can also separate the business's ownership and its management. The separation may help protect the business from beneficiaries who cannot manage it. Maybe the beneficiary cannot manage the business because:
- They are still a minor
- They are mentally incapacitated
- They don't have the necessary management skills and experience
- They don't want to run the business
- They are busy with other things
This option also allows multiple beneficiaries to benefit from the business without running it, especially if the beneficiaries have opposing ideas on how to run the company. For example, you can give the beneficiaries nonvoting stock and let another person be in charge.
Prepare the Beneficiaries
To protect the business, you must prepare the beneficiaries. The intended recipients of the business, especially if you wish them to own or manage the business, should not learn about it from the executor. Therefore, you should:
- Let the beneficiaries know of your intentions to bequeath them the business
- Inform the beneficiaries of your vision for the business
- Train the beneficiaries on how to manage the business
- Incorporate the beneficiaries in the business management to help them learn the ropes
If you don't prepare or create a plan for your succession, your key employees, such as the managers, might leave the business abruptly when you leave. Such an overnight change of guard might harm your business. Therefore, your key employees or managers should also be part of the preparation.
Minimize Estate Tax
Estate taxes can harm your business in multiple ways. For example, beneficiaries with liquidity problems can struggle to pay estate taxes if you leave them the business. Take measures to minimize estate taxes whichever direction you wish the business to take in case of your demise or incapacitation.
To minimize taxes:
- Provide your beneficiaries with the money, say in the form of life insurance, to pay the estate tax
- Give your beneficiaries the business in the form of systematic gifts or stock sales over a period of time
Work with financial experts to minimize taxes without breaking the law.
Create a Trust
Create a trust to protect the business from your beneficiaries and still enjoy the proceeds of the business. You can use a grantor retained annuity trust (GRAT) for this purpose. That way, the beneficiaries only gain complete control of the business at the end of the trust's term.
Donald B. Linsky & Associate PA can help you plan your estate and ensure it includes all your assets. We have been in the industry for decades. We will guide you using estate planning laws to ensure your plans are enforceable.
Contact us today to start your estate planning process.
