Estero Estate Planning Lawyer

Succession Planning - To Do Or Not To Do

Many business owners are so consumed with day-to-day operations they don’t feel they have time to consider estate planning, particularly since it can raise emotionally charged issues. Estate planning for a business owner requires thinking about business succession planning. Will the business be sold when the owner is ready to retire, or will a spouse or one or more of the children continue to run the business after the owner’s retirement or death? If the business is to continue, who will own it and will those who are expected to run the business have the necessary knowledge and ability to do so successfully? If there are multiple owners/partners, is there a mechanism in place to allow a deceased owner’s estate to be paid a fair price by the surviving owners for the deceased owner’s interest?

Unfortunately, only a small percentage of family-owned businesses are successfully transferred to the next generation. Attempted transfers fail for many reasons. The next generation may not have the necessary skills to keep the business going. If ownership of the business is divided equally among the owner’s children but not all of the children work in the business, this can lead to disputes among the co-owners that can scuttle the enterprise. If the owner’s estate is large enough to trigger an estate tax, there may not be sufficient cash to pay the tax without a forced sale of the business.

One important planning tool where the business has more than one owner is a buy-sell agreement that will allow a retiring owner, or a deceased owner’s estate, to receive fair value for his or her ownership share. This agreement can provide for a fair market purchase by a promissory note at a reasonable rate of interest when one owner retires, or it can be funded by life insurance policies on each owner that will allow the policy proceeds to be used to buy out a deceased owner’s share, in both cases without forcing the liquidation of the business.

A business owner who hopes to pass his or her business to the next generation needs to think and plan carefully. If possible, the best plan may be to give the ownership of the business to the child or children working in the business who will take over its management, and to leave other assets of equal value to the non-participating children. Where the business comprises the bulk of the owner’s estate, this may not be possible. In that case, the owner might consider purchasing life insurance to provide cash to give to the non-participating children, if this is an economically viable option.

Another option might be to structure the transfer of ownership so that the children actively involved in the operation of the business end up with complete control over the management of the enterprise and the non-participating children receive their interests in a form that allows them to receive their share of the net profits of the business but without the ability to control or interfere with the control of the business.

If the business comprises more than 35% of the owner’s estate, after the owner’s death the estate may qualify (under Internal Revenue Code Section 6166) for a deferral of the estate tax attributable to the business and elect to pay the tax in installments over as many as 15 years. This election is intended to avoid the forced liquidation of the business and to allow future profits to be used to pay the estate tax.

In short, business owners have unique estate planning issues and planning early, while the owner is still hearty, is the best way to improve the odds that the company will thrive after the owner is gone.