Family Owned Small Business Transfer
A family owned and run business is often the sole, or major, source of earnings for the family. Transferring the assets of your family owned business to the next generation involves a lot of planning, including delegation of responsibilities, continuation of business policies, minimization of estate taxes, and investment of the resultant funds you receive into suitable portfolios which maximize returns without being hit by massive withdrawal taxes. Thus succession planning for a family owned business can be divided into three major issues – Continued success of the business by ensuring a smooth transition, estate planning and investment decisions.
If you plan to pass on the business to one or more of your children, there are a lot of questions which need to be answered. First of all, are any of your children interested? If so, do they have the experience or capability to run the business? Will they have the same priorities as you did when you ran the business? If more than one child is interested in taking over, how would you resolve that? Will they be able to cooperate and work together? What about the right of your other children, who are not interested in taking over the business? Most of these questions should be settled only after exhaustive discussions with your entire family, one on one and as a group, and the final structure of the succession plan drafted in consultation with an experienced and trusted estate planning attorney.
Post retirement, you need to answer two very important questions. Firstly, how are you going to compensate for the lost income? Secondly, what are you going to do with your time? The answer to the first question lies in retirement planning. In addition to any accumulated funds in retirement plans which you now have access to, you will also have received compensation for handing over your stake in the business. How well you invest both these funds will determine your liquidity and post retirement income. Please consult a financial planner to work out a diversified investment plan and portfolio which includes stocks, bonds, mutual funds and maybe an immediate annuity to assure you of a guaranteed income stream.
The second question deals with your time. Most small business owners find it exceedingly difficult to let go. That means that it’s very likely you’ll end up as an informal advisor to whoever takes over the business. A good way to maintain a link to your business, without getting highly involved in the decision making, is to lease the real estate on which the business is conducted using a family limited liability company, instead of selling it outright. This ensures that you create an additional source of income for your retirement, while maintaining some links with your business.
Estate planning, and how to save your business from being hit with massive estate taxes is a topic which requires special planning and use of available investment and asset transfer strategies, which can be finalized in consultation with your attorney and financial planner. Please refer to the section on estate planning for information regarding existing regulations and detailed strategies.