An alarming number of business owners do not have succession plans for what will happen to their businesses when they retire, die, or become disabled. Financial professionals expect the demand for business succession planning to grow as the baby boomers continue to age.
When creating and growing a small business, many business owners never think of succession plans. However, all small businesses should have a plan for succession if they want their business to continue on after they are gone.
As with any part of a business, the earlier you create a succession plan, the better your chances that the plan will be successful. With such a plan, you can not only decide who your successor will be, but exactly how the business will be transferred. Moreover, a solid succession plan can assist you in transitioning into retirement.
The first key step to creating a succession plan for your business is determining how profitable the business may be after you are no longer running it. Along with this consideration, consider what steps you need to take in order to keep your business profitable. You also need to think about what your ultimate goals for the business are, whether you want a family member to run the business, or whether you want to sell it to a key employee.
An article in Forbes likens asset planning to “taking chips off the table in good times, so that you can still walk away from the table a winner.” With that idea in mind, the article offers several tips for protecting your assets from creditors.
One of the first things you can do to protect your assets is to have a plan for asset protection before a claim even arises. This is important because creditors can potentially undo many asset transfers undertaken after a claim arises under various “fraudulent transfer” laws. Moreover, if a creditor is successful in undoing a fraudulent transfer, he may also be able to hold the debtor, as well as anyone who assisted in executing the transfer, liable for attorney fees.
Clients must also realize that asset protection is not a substitute for having a proper insurance policy. Asset protection, rather, should be seen as a supplement to one’s liability and professional insurance plans. Moreover, in the event of a lawsuit, proper liability and professional insurance will pay to defend and settle the lawsuit. An asset protection plan will not.
A final note offered by the article is that asset planning should be based on the underlying assumption that creditors will be aware of and understand the purpose and extent of your asset protection plans.
When one estate planner hears his business-owning clients say, “I love my kids equally, so I want to share my assets equally,” what he actually hears is, “I don’t know how to handle this, so when I’m gone, I’ll leave the business to the kids and let them sort it all out.”
The article in Forbes goes on to state that clients who truly want their business to continue to grow and thrive after their death, but also want their children to succeed in whatever career path they have chosen, should speak with an estate planning attorney about logically equalizing their children’s inheritance.
One potential method of inheritance equalization is through life insurance. Using this strategy, one can set up their estate plan so that, upon their death the children who would like to take an active role in the family business inherit your stock in the business, while those children who have chosen another career path receive monetary inheritance equivalent to the value of the stock through life insurance death benefits and other non-business assets you hold at the time of death.
Through inheritance equalization, parents can create equal and equitable transfers to the next generation.
In light of the fiscal cliff bill, a recent article in Forbes offers some estate planning advice for married couples.
One important item made permanent by the fiscal cliff bill was portability, the ability for a widow or widower to increase their $5.25 million tax-free amount by the unused exemption of their recently deceased spouse. When using the two exclusions in tandem, a widow or widower can potentially transfer up to $10.50 million tax-free.
Regardless of portability, spouses are able to transfer unlimited funds to each other both during life, as well as part of their respective estate plans. This is known as the marital deduction. Without portability, however, the first spouse’s tax exemption is often lost when the second spouse dies. Careful tax planning maneuvers, such as bypass or credit-shelter trusts, are often used to avoid this problem.
With the extension of portability, spouses who qualify will not have to create bypass or credit-shelter trusts for the sole purpose of preserving their deceased spouse’s federal exemption amount. The extension of portability only applies to spouses who died after December, 31, 2010. It is important to remember that portability is not automatic. In order to utilize this tool, an estate planner will have to assist you in transferring the unused exemption to the surviving spouse.