Succession Planning for Small Businesses

Business Succession Planning

Small business owners need a plan for what will happen to the business after they pass away.  It’s a difficult issue for most over-worked entrepreneurs, especially for owners with multiple heirs who may not all agree on how the business should be run, or even if it should continue running, after the owner passes.

But, like it or not, a business succession plan is essential for a number of reasons, including:

1. Taxes.

Without proper planning the tax consequences to heirs can be severe for businesses with values in excess of the estate tax exemptions (for individuals: $1 million for Oregon and $5.49 million for the IRS).  A business succession plan can protect the business and the owner’s heirs from being saddled with an unwelcome and crippling tax bill.

2. Continuity.

A succession plan will enable prudent decision-making about the business after the owner is gone.  Without a plan, businesses passing by operation of law or under a simple will to a group of heirs are often doomed to fail through gridlock and will end up being liquidated for pennies on the dollar.

3. Business Health.

A good succession plan doesn’t just benefit the owner’s heirs.  A good succession plan, and the work that goes into making one, can result in a healthier and more organized operation with added protections for the business and the owner heading into retirement.

4. Peace of Mind.

As we often tell our estate planning clients, planning isn’t just for your loved ones.  Putting a plan in place for what will happen after you pass away can give you peace of mind, so you can relax and enjoy the next phase of your working years or retirement.

5. Financing Retirement.

Where appropriate, a succession plan that involves the sale of the business to family members (or others) before the owner’s death can generate regular income for the owner while ensuring a healthy transition to the next generation.

How does succession planning work?

Business succession planning is typically done in concert with the formation or update of an owner’s overall estate plan.  It involves an initial consultation with an attorney to discuss the details of the owner’s business, from its assets to its daily operations, the owner’s wishes, and the anticipated family dynamics after the owner passes away.

From there, the attorney will draft multiple documents and agreements, depending on the specifics of the plan, and may schedule additional calls or meetings with the client as necessary.  Other professionals such as accountants, insurance brokers, financial advisors, and business appraisers, are often brought in as part of this process.

There are many different ways to structure a succession plan, and every business and family has different needs.  In some circumstances, it makes sense from a tax perspective for owners to gift portions of the business over time to heirs. For others, a lifetime sale to heirs in return for installment payments during retirement is the best option.  Another option is a Grantor Retained Annuity Trust (GRAT), an irrevocable trust that makes payments to the owner for a specific duration of time, after which the heirs take the business tax free.

As you can see, business succession planning is complicated, and crafting the right plan for your business involves some time and money, but the rewards to you and your loved ones are many.  To learn more, call us or use our online tool to schedule a consultation with one of our estate planning attorneys.