Magazine article The CPA Journal

Facing the Reality of Succession Planning

Magazine article The CPA Journal

Facing the Reality of Succession Planning

Article excerpt

As an estate and retirement planner, I often find that one of the most overlooked areas of planning is succession planning. It amazes me to see how many individuals build family businesses and fortunes over their lifetimes, only to lose it all because they were too busy creating their dynasty to preserve it.

It is estimated that over half of all family-owned businesses never make it to the second generation. Why? Because of the unexpected: the sudden death of the business owner and the corresponding confiscatory estate tax bill, the disability of an owner, the retirement of a partner, or unresolved family conflicts.

Business succession planning will not only help to ensure the continuity of the family business for future generations, but it will also assist the current owners in reaching their goals. As current owners pass the torch to younger generations, they must also obtain the financial security to support their own future needs and retirement dreams. For some, financial needs are greater during retirement because of an increased desire to finally enjoy the fruits of their labor.

Planning Techniques

Here are some tips to help your family business continue for future generations.

Buy-Sell Agreements. Ascertain that a properly funded buy-sell agreement has been drafted. The agreement should be continually updated to reflect the changing needs of the owners and values of the business. In the event of a partner's death, the agreement will ensure that the heirs will receive a fair price for their interest. It will also provide immediate lit uidity for their business interest.

A disability buy-sell agreement can also protect against a shareholder's permanent disability. The disabled partner's interest easily can be bought out from the business, thereby relieving the burden of supporting an unproductive partner.

Estate Planning. Partners should evaluate their estate tax exposure in conjunction with their business succession planning. Business valuations should be updated along with the proper valuations of other assets such as real estate and investments. For some, the best estate plan may be to spend everything: Go on vacations, buy gifts for the children and grandchildren, pay for their college education, or just give it all away. Then again, how many people are willing to surrender control of their assets during their lifetime to protect their children's inheritance? Frankly, not many.

Life Insurance. There are those individuals who dislike life insurance because they have difficulty paying for something expensive that they will never see. However, life insurance, if properly utilized in an estate or succession plan, can enable individuals to maintain control and protection of their assets, effectively reducing their state tax rate to possibly 10 or 15%. …

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