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Unique considerations in succession planning

On Behalf of | May 19, 2022 | Business & Commercial

One of the most challenging issues that arises over the generational viability of a closely held business is in matters of succession planning. Unlike estate planning, succession planning strategizes the continuance of operations as the business passes hands on the death of the owner.

Like estate planning, equalizing asset distribution among family members can be fraught with consequences, and one person’s vision for the company may be at odds with another’s. In succession planning; however, the decedent’s debt or tax liability could profoundly affect the company’s sustainability, depending on its business structure, and concerns over a successor’s competency and ability to manage things could directly impact the business.

For business owners in the Baltimore and Washington, D.C., areas, having a succession plan in place not only protects their interests for their family and future generations but it also ensures that the business will continue to grow for years to come.

Deciding to keep or sell the business

Some of the decisions a business owner must make as part of succession planning is choosing between keeping it in the family or selling it. If it is a partnership, a buy-sell agreement can establish the automatic purchase of the decedent’s interest and provide the required liquidity through a life insurance trust. This action will prevent ownership transfer to heirs.

Part of creating a succession plan will include both management and ownership transfers:

  • Coordinating management and ownership functions.
  • Developing, training and delegating successors’ responsibilities.
  • Retaining employment functions with equitable compensation for management, family employees and shareholders.
  • Determining what is in the best interests of the family and business.
  • If the owner arranges ownership transfer during their lifetime, making sure to consult with the successor to ensure a fair price.

Avoiding tax liability during probate

Unless there are beneficiary designations, all assets, even business assets, will likely go through probate. There are ways of minimizing tax exposure to the business, however. A business owner can trust business assets to family members in their lifetime through a:

  • Grantor retained annuity trust (GRAT).
  • Grantor retained unitrust (GRUT).

Having an irrevocable life insurance trust (ILIT) can also minimize tax exposure. If set up properly, an ILIT will cover the gap in the difference of the valuation of the business at death without going through probate.