Every family-owned business should have a succession plan to provide a smooth transition of ownership upon the owner's retirement or death. Each plan will be different, depending on the owner's wishes and the particular circumstances of the business. Here are some of the planning techniques you may want to consider.
* A buy-sell agreement provides for family members, partners, or the business itself to buy back the owner's shares upon certain specified events such as disability, retirement, or death. The agreement specifies the details of the sale and usually includes a pricing formula. Purchase of the stock is often funded by life insurance policies owned by the company or family members. Advantages are that the transfer of ownership is spelled out in advance, shares are kept out of the hands of competitors, and proceeds from the sale of the shares can be used to offset estate taxes. See also Who should own your life insurance policy?
* Gifting shares or partnership interests to family members can be an effective way to transfer ownership of the business over time. The law allows an annual tax-free transfer of $10,000 to each recipient (see Can Gifts Reduce My Estate Taxes? for more information). As an added advantage, the IRS allows you to discount the shares below their appraised value if they are a "minority interest" which does not control the business.
* Employee stock ownership plans (ESOPs) offer a tax-advantaged way to sell your business if you have no family successors. Special tax rules allow you to sell the company to your employees via an ESOP and invest the proceeds in stocks and bonds meeting certain tests, without being taxed on the gain. Employee-run businesses have had mixed success, however, so you should consider factors other than just the tax benefits.
These are just a few of the many planning techniques available to closely-held businesses. Contact us if you'd like to discuss a succession plan for your business.
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Succession Plan
© Copyright 2000 Raymond S. Kulzick. All rights reserved. 000905.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.