What is a Business Succession Plan?
A business succession plan involves a series of financial and logistical decisions for transitioning your business when you die, become disabled, or retire. Business succession plans are a key part of retirement planning, of course. But, they also serve important functions earlier for the business and as part of effective estate plans. Unexpected things happen in life. A business succession plan can also help reduce drama and financial loss during a business transition. In short, a well-crafted business plan offers benefits to all those involved; the owner, his or her family, the business, and the successor to the business.
Why is Business Succession Planning Important?
Small business owners, in particular, can benefit from business succession planning. First, the owner must determine whether the company will continue operations after their departure due to death, retirement, or incapacitation. In some instances, a business owner may decide to liquidate assets and close the business entirely. Other business owners might want their business to continue without them.
If the owner decides the business should continue, a successor will be chosen. They may be a family member, an employee or third party who understands the business and is willing to take the place of the owner. When a successor is designated in advance, transitions are significantly simplified, and expectations are appropriately set. These advance preparations ensure guidance from the owner can assist the future leadership of the business. Employees can also remain secure in their jobs.
How Does My Business Fit into My California Estate Plan?
Your California estate planning attorney can help you create and implement a sound business succession plan which will provide benefits to the owners and partners of the business, as well as leave your family with security in the event of an untimely death or incapacitation. A business succession plan ensures a fair price for a partner’s share of the business, eliminating the necessity for valuation. The policy benefits of a business succession plan are immediately available with no time constraints. In certain business structures, this could prevent the potential for an external takeover due to cash flow problems. Finally, a solid business succession plan can help establish a timely settlement of the entire decedent’s estate.
Protecting the Finances of a Business in Transition
Many business owners have a line of credit or a bank loan to keep their business operating. When a business owner dies or becomes disabled, a lending agency can potentially call in the debt. This forces immediate repayment of the loan. A business succession plan will take business loans into account. It will provide a plan for repayment of the loan, even designating specific assets or funds for repayment. A thoughtful, comprehensive business succession plan prepares all those who depend on the business, even when the unexpected happens.
Business Succession Plans Can Minimize Taxes
A thoughtful business succession plan can minimize the potential tax consequences of any transfer of ownership. The 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, allows married couples a two-year window to give away up to $10 million in gifts. This becomes a great opportunity to reduce the tax liability for business owners. It is extremely important that you engage tax liability reduction as a part of your overall estate plan—and with the help of your California estate plan attorney.
What Does Business Succession Planning Involve?
Business owners who are at or near retirement must never ignore the subject of business succession planning. The success of your business succession plan truly depends on the choice of a successor. Thus, this choice is rarely an easy one. There may be a number of partners, family members, or employees to choose from, and it is almost certain that there may be hurt feelings among those not chosen. As an aside, a business owner with a partner may choose to sell their portion of the business to the other partner, rather than choosing a successor. The choice of a successor could be logical and easy but is much more likely to be a difficult one.
As part of the business succession plan, a dollar value for the business—or the owner’s share—must be determined. A CPA’s appraisal, or through an arbitrary agreement between the partners determines the valuation of the business. The current value of any publicly traded stock determines the stock’s current market value.
When the value of the company is determined, life insurance is purchased on each partner in the business; should one of the partners die, the death benefits will be used to buy out the deceased partner’s share, distributing that share equally between the remaining partners. This can also be accomplished through a cross-purchase agreement or an entity-purchase agreement.
- Cross-Purchase Agreement–A cross-purchase agreement is structured so that each partner buys—and owns—a policy on each of the other partners. This makes each partner both an owner, as well as a beneficiary on the policy. Therefore, should one partner die unexpectedly, the policy pays face value to the remaining partners who use the proceeds to buy out the share of the business owned by the decedent.
- Entity-Purchase Agreement—Some businesses have a large number of partners, making it impractical for each partner to maintain a separate policy on each of the other partners. There could also be significant inequity between partners regarding underwriting, therefore, the cost could vary greatly from one partner to another. There could even potentially be problems with two or three partners if one of the partners happens to be 25, and the other two are well into their sixties. This would create a substantial disparity in the cost of the policies; therefore warranting an entity-purchase agreement. In an entity-purchase agreement, the business purchases a single policy on each partner, becoming both the policy owner as well as the beneficiary. When one partner dies or becomes incapacitated, the business then uses the proceeds of the policy to purchase the share of the business owned by the decedent. The policy costs are usually deductible for the business, and the business absorbs all costs, underwriting equity between the partners.
How an Experienced California Estate Planning Attorney Can Help
If you’re seeking assistance for your California estate plan, and you own a business, having a knowledgeable California estate planning attorney to help you integrate your estate plan with business succession planning is a very positive step. Attorney Mark Gullotta has been helping Californians plan for their futures for more than fifteen years. Mark believes in proactive estate planning to help eliminate the unexpected and ensure your loved ones are always well taken care of. Mark offers upfront pricing, a comfortable estate planning experience, and answers to your questions every step of the way. California estate planning attorney Mark Gullotta serves San Bruno, California and San Mateo County. If you have a business to protect and need to integrate business planning into your overall estate plan, contact Mark Gullotta today