If you own a family business, a smart succession plan is essential, and if you’re like most business owners, a significant portion of your wealth is tied up in the business, so you’ll be relying on it to generate income for your retirement and to provide for your family. Unfortunately, only one-third of family businesses survive the transition to the next generation. At Gumbiner Savett we have many owner/operator clients in various industries, so the topic of succession planning is something we discuss with them all the time.
Succession planning involves a variety of complex issues, such as identifying and grooming a successor, determining how to treat family members who aren’t involved in the business, and ensuring sufficient liquidity to pay taxes and other expenses. It’s also important that your succession plan include strategies to minimize the impact of gift and estate taxes.
Early Transfer of Ownership
The earlier you begin transferring ownership of the business to your children or other family members, the easier it is to reduce the tax bite.
Transferring the business gradually over time also allows you to take advantage of minority interest valuation discounts, which means you can transfer more of the business at a lower tax cost. Once you transfer a business interest, any future appreciation in value bypasses your estate, so there’s a big tax advantage to starting early.
Maintain Control of Your Succession Plan
Many business owners are reluctant to relinquish ownership because they fear losing control of the business. But there are a variety of techniques you can use that allow you to start sharing the wealth without giving up control — stay tuned for my next post about examples of how to accomplish this.