If you are the child of a business owner, you will most likely find yourself dealing with succession planning issues sooner or later. In fact, if your parents haven’t volunteered to discuss this with you, chances are you will have to bring up the subject. When you do discuss the subject, expect to meet some resistance and prepare to be patient. This is an emotional issue for most business owners on several levels.
Understanding Your Parents’ Perspective
While you may be approaching this subject from a business position, be prepared to deal with the emotions involved. For many people, the prospect of succession planning means facing their own mortality. Clearly, this will be difficult. Also, business owners may attach their sense of self worth to the business they have built over the years. The idea of letting the business go may also mean the thought of abandoning one’s self worth. Finally, regardless of how much your parent loves you, it may be difficult to trust you with running the family business. In addition, the idea of choosing one child over another as successor may be daunting.
Anticipate Tax Implications
One reason a business can die before reaching the next generation is failure to implement proper estate planning. If you don’t have a proper estate plan in place, concern over whether heirs will improperly run the business won’t matter, because those same individuals may be forced to sell the business just to cover the estate taxes.
Estate taxes are levied on the transfer of an owner’s property upon death. The federal estate tax rate for a business valued at $3 million or more is generally over 40 percent. Therefore, if the family business is the major asset, this estate tax liability will be of particular concern. It would behoove you to encourage your parents to see a specialist in estate planning. A professional can analyze their estate and make recommendations for preserving the business for following generations. Estate planning will also be easier to accept when business owners understand that proper planning may help them transfer wealth to their heirs rather than to the government.
Gifting the Business Stock
Another option for parents planning on transferring ownership of the family business along with reducing the size of their estate can be through gifting stock to the children. This can aid substantially in reducing estate taxes. This is particularly advantageous for those family businesses that are not yet highly appreciated in value and are anticipated to grow over time. A business owner can make annual gifts of stock worth up to $10,000 to each child, without paying gift taxes. If made jointly with the business owner’s spouse, the amount increases to $20,000. Through gifting the stock, your parents can potentially take advantage of special valuation rules allowing owners of closely held companies to give away minority interests in the company at a discounted value.
Buy-Sell Agreements
Fear over losing financial security can cause a business owner to procrastinate on transferring control or stock ownership to the next generation. Not only do owners have concerns about how the business will go on without them, but also how they will go on without the business. It is very important that the plan you develop thoroughly accounts for your parents’ financial needs. This will go far in helping business owners release control over their company to the succeeding generation. Most of us would naturally be hesitant to change our current employment status if we didn’t feel confident that our financial situation was secure.
This is where a buy-sell agreement may be useful. A buy-sell agreement is a legal document explaining how ownership will change hands in the event of the owner’s death, disability or retirement. To accomplish this, the buy-sell agreement must address the value of the company’s stock, and provide a way to fund the shares. One option is the purchase of life insurance.
You may find that your biggest challenge throughout this process is in simply sitting down with your parents to discuss it. However, don’t let this tempt you to procrastinate. Through clear communication and the services of a qualified certified public accountant or estate planner, developing a plan that fulfills your parents’ and your wishes for the family business is entirely possible.
