According to the Small Business Administration, small businesses make up approximately 99.7 percent of U.S. employer firms. Of that number, approximately 78.5 percent of U.S. small businesses are non-employer (businesses without employees). More than 50 percent of all small business owners are 50 or older.
Although small business owners usually understand the importance of traditional estate planning, such as the preparation of a will and a living trust, oftentimes small family businesses fail when the sole principal dies, retires or otherwise becomes incapacitated because no business succession plan was prepared and implemented beforehand. Estate planning and succession planning go hand in hand but are separate legal concepts.
According to a 2016 Gallup poll, 68 percent of Americans aged 65 and older have a will. However, a 2017 study conducted by Nationwide Mutual Insurance Company found that 60 percent of small business owners do not have a succession plan.
The absence of a viable business succession plan lends itself to litigation, oftentimes between family members, over the ownership and control of the business and, in some cases between the business owner’s estate and the Internal Revenue Service (IRS). The last thing that any business owner should want is a nasty fight between his or her own family members or the IRS because no direction was given on what to do after the business owner retires, dies or becomes infirm.
A functional succession plan will usually require the assistance and advice of an attorney, an accountant, and a financial advisor. The process, however, is not painful if done correctly and really boils down to one primary inquiry: what do you want to happen to your business when you die or retire? A retirement is often a pre-planned event whereas death is not. Your plan should address both scenarios.
The most common concerns which should be addressed in a business succession plan are:
- The importance of continued family ownership and management of the business;
- The future cash flow needs of the current business owners;
- The tax implications of selling or otherwise transferring business interests to family members or third parties, including gift and estate tax implications and
- The implications of an unforeseen death or divorce of the business owner(s).
Choosing the right professionals is half the battle. While there are many good attorneys that regularly assist clients with estate planning and there are many good accountants that regularly assist clients with the preparation of income tax returns, competent business succession planning typically requires a unique knowledge and understanding of business law and estate and gift tax law that many attorneys and accountants are not regularly exposed to. It is always a good idea to obtain proposals from a few attorneys before committing to one. Many reputable business succession planning attorneys will not charge you for the initial consultation.
Modern business planning, more often than not, includes a trust component as well. Family trusts and asset protection trusts are routinely used to hold ownership interests in businesses. Incorporating asset protection trusts into a succession plan is intended to create an extra layer of protection from the owner’s personal creditors, to streamline succession and also to minimize the chances of family feuds concerning the ownership and control of the business through the generations. Trust drafting can also be complicated, especially asset protection trusts which require strict adherence to Nevada law. A poorly drafted asset protection trust oftentimes results in no asset protection at all and completely defeats that component of a business succession plan.
Paying an attorney (let’s face it, we’re not cheap) is for many an undesirable act, especially for a product that does not spring into action until sometime in the future. As the old saying goes though, an ounce of prevention is worth a pound of cure. Getting your business succession plan in place now can save your family from a disaster down the road.
Alexander G. LeVeque, Partner, Solomon Dwiggins Freer, Ltd.
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