Plan Ahead for Family Business Succession

It takes fortitude, innovation and perhaps a little bit of luck for a business to thrive in these uncertain economic times. But what will happen to the operation when the owner is no longer able to chart the course? According to a recent national survey, 25% of family-business owners who are close to traditional retirement age have not completed a comprehensive succession plan.

Essentially, such a plan is a road map for heirs and business associates to follow in the event of death, disability or retirement. It may include provisions to distribute stock and other assets, acquire or amend life and disability insurance policies, arrange buy–sell agreements, divide responsibilities among successors and tie up any other loose ends. The plan may also establish the value of the business for various purposes.

Where does one start? First, the owner must clearly establish his or her objectives and define the financial circumstances. Next, several critical questions must be answered, such as whether the owner intends to retain some level of control, whether there is a capable successor within the ranks, and whether there are sufficient assets to pay any estate tax, distribute assets and still keep the business running. It requires some frank discussions with any co-owners or partners, family members and key employees.

Here are several other points to consider:

*The plan should be flexible. Business, family and health situations are ever-changing, so make the plan relatively easy to modify.

*It is important to designate the “right person” to take over the reins. This can be a difficult process if there are several viable candidates among the children, siblings or business associates. Similarly, dividing up business assets in an equitable fashion can be a challenge if one hopes to preserve family harmony.

*Develop a basic understanding of the prevailing estate-tax laws. Among other current favorable provisions, an estate of a decedent dying in 2012 can benefit from a $5.12 million federal estate exemption and a 35% top estate-tax rate. But many provisions are scheduled to be curtailed in 2013. For example, the estate-tax exemption will be reduced to $1 million, while the top estate-tax rate will be raised to 55%.

*Also, be aware of gift-tax benefits. Under the annual gift-tax exclusion, a donor can gift up to $13,000 per year to each recipient ($26,000 for joint gifts by a married couple). The exclusion is allowed in addition to the lifetime gift-tax exclusion (subject to the same dollar figure as the estate-tax exemption).

*Consider establishing the fair market value (FMV) of your company. The FMV is usually defined as the amount a buyer would be willing to pay under the usual circumstances. It can be incorporated in a buy–sell agreement that will keep the business afloat in the event of a sudden death or disability.

This is generally not a do-it-yourself proposition. Knowledgeable professionals can provide the necessary assistance.

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