What will happen to your business when you retire? What will happen to it if you die or become incapacitated?
These are questions that will likely come to mind as you prepare or update your estate plan. Therefore, here are three business succession options to consider:
1. Leaving the business to co-owners
If you have co-owners, you can draw up a buy-sell agreement. This specifies that if one of the business owners dies, the others automatically purchase his or her interest. This is an approach you can take to ensure that family members do not unintentionally become owners of the business upon your death. You can establish an irrevocable life insurance trust, or ILIT, or purchase life insurance to provide the necessary funds for a buy-sell agreement.
2. Transferring to the children
When planning for retirement, you may consider setting up a grantor retained annuity trust, or GRAT, to transfer business assets to the children. This is an effective way to pass along a rapidly growing business. At the same time, you can retain an income source for yourself.
3. Creating a family partnership
Another option is to establish a family limited partnership to hold your business assets. You can transfer some of the units to your successors. By doing so, you will eliminate them from your taxable estate.
Developing an effective plan
A good succession plan should include certain key points:
- Development and training of successors
- Delegating authority and responsibility to successors
- Methods of retaining key employees, such as planning equitable compensation
As you decide on the future of your estate, develop your succession plan in consideration of the most favorable interests of both the business and your family. Also consider who will own the business and who will manage it, because these responsibilities often fall to different people. If you plan the transfer to occur during your lifetime, you will have the opportunity to work with your successors to ensure a smooth transition and preserve your peace of mind.