PLAN NOW TO HELP PROTECT YOUR COMPANY AND YOUR FAMILY
If you haven't developed a succession plan for your business, the time to start is now. Consider how you've built your company. Think of the enormous effort you've put into it. Something like this deserves to last after your death or retirement.
Unfortunately, many business owners wait too long to plan their exit strategy — or don't plan it at all. The longer they wait, the more their options for a successful business transfer narrow. Have you made preparations for your family members if you leave the company? Your succession strategy can have a big effect on them. You also need to take steps to limit taxes as much as you can.
One option is to arrange to sell, merge or liquidate the company if you die or retire. This can provide an immediate return that can be distributed as you see fit. But many business owners prefer to transfer ownership to family members or employees. A succession strategy of this sort requires forethought and careful planning.
Business transfers: Know your options
A business transfer to family members raises a number of concerns. Much depends on family dynamics and whether there are members able and willing to take the reins.
You can make the transfer during your lifetime in the form of a gift. If you do, the IRS requires that you value the company for tax purposes. Business valuations are subject to federal audit, so make sure you use an experienced and independent appraiser.
An alternative succession strategy is to leave the business to your heirs, either outright or in a trust. If your heirs decide not to continue the business, they can sell it and receive the proceeds.
Another option is to groom key employees to take charge of the company. To do this, you can establish a partnership or buy-sell agreement that becomes effective when you leave. Alternatively, you could create an employee stock ownership plan (ESOP). This creates a trust that purchases the company from you and transfers ownership to your employees.
Think about costs
Your succession plan should ensure that funds are set aside to pay estate settlement costs. The settlement costs will include state inheritance and federal estate taxes. You can use a combination of life insurance, savings, and charitable tax planning strategies to meet these obligations. Your succession plan should also establish a way to provide income to your survivors, which may come from deferred compensation plans, dividends or stock redemptions, life insurance proceeds, or irrevocable trusts.
The Small Business Administration and Family Business Institute provide detailed advice for creating an exit strategy. Also consult with your business banker, who understands your company and can help you craft a plan that gives every possible benefit to you, your business and your family.
City National Bank offers a full suite of financial planning services and succession planning to help you protect, increase and transfer your wealth.
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