What steps can a business owner take to preserve wealth for heirs, or begin to transfer the business?
Taxes will have to be paid if they are due, but there are ways to reduce estate taxes. There are ways to transfer assets during your lifetime, outright or in a trust, that are below the threshold of having to pay tax now. There is also the possibility of taking advantage of any discounted valuation of the business available with appropriate planning.
If you don’t have assets that are liquid and have no estate plan, an heir may have to sell your business to pay estate taxes. However, if you are insurable you can have insurance purchased in an irrevocable life insurance trust and the proceeds will be outside of your estate for tax purposes. That provides liquidity for your heirs if estate taxes are due.
As mentioned above, to begin transitioning the business, you can enter into a close corporation agreement between you, as the controlling owner, and someone who is not. It’s a transfer of the business, but with restrictions on some things that can’t occur without the consent of all parties, guarding against future uncertainty. For example, if you transfer the business directly to your son, he could then sell the company without your consent. A close corporation agreement can be drafted to prevent that from happening. This protects the owner, who has always had an income stream from the business and wants to ensure that the income continues into the future.
It’s one way to transition the business effectively, without animosity or the need for an adversarial setting.
Can a business owner develop a plan on his or her own?
I would strongly advise someone to consult with an expert to gain an understanding of the things that need to be addressed, as opposed to simply going online and filling out a will.
In an initial meeting with an estate planning attorney, he or she will review your assets and listen to your intent, not only for your family members but for your business interests as well. Ideally, that person will also work with your CPA or broker, creating a team to assist you with a comprehensive plan of what you want to happen. Be prepared to discuss your concerns, how you see the business operating without you and what you want to pass on to your family members in light of the time and energy you’ve put into the business.
Once the plan is in place, it should be reviewed every few years to see if your intent or assets have changed and if you need to make revisions.
Loma L. Swett is a partner in the Estate Planning & Probate Group at Stark & Knoll Co., L.P.A. Reach her at [email protected] or (330) 376-3300.
