You spent your life building a successful business, and you don’t want to see that wealth disappear with your death or retirement. But transitioning a family business to a new generation can be a difficult process. Many attempts at this transition fail, so if you want to keep the company in the family, you need to have an open conversation with your heirs to help them understand your desires and to make sure that one of them wants to continue running the business. Here are some steps you can take to avoid legal disputes and ensure that your legacy will pass to the next generation.
Creating a Succession Plan
The first step is to talk to your family about your plans. You can do this with your estate planner or with a financial advisor, but either way, there are few things you should consider ahead of time:
- Write out your vision so it can be clearly stated
- Have a valuation ready to be discussed
- Be prepared for questions
- Be prepared for conflicts
- Be aware of any issues that could arise during the transition
Transferring the Business
There are many ways to give your business to your child or children, and each one has its own pros and cons. Be sure to discuss your options with your estate planning attorney.
Some of the most common methods of succession are:
- Gifting – This method works out well for most, as the business may be gifted in a will or through a trust. Often, there can be some tax savings associated with gifting the business to a family member.
- Standard Installment Sale – With this process, you sell the business, taking installments over a period of time, much like a loan. Usually, the business is sold at market value with interest. This method also can have appealing tax implications.
- Self-canceling Installment Note – This type of sale includes a provision that cancels the amount still due on the note upon the death of the grantor. The grantor’s estate may not collect the remaining balance from the buyer.
- Private Annuity – You can plan for your own lifetime income and sell your business to your children or other family members with this plan. Essentially, you sell the business with the idea that payments will be made to you for remainder of your life.
- Estate Equalization – This option can be best when several children are inheriting the business. Under this method, you plan to give other assets to children who will not be working in the business so that each child has an equal inheritance. Disputes often arise when some children do not inherit a portion of the business like others do, so it’s important that if they are to be otherwise provided for in the will, they receive a proportionally equal share of the estate as those children who receive the business.
Are you looking to start planning the transition of your business and want to avoid a dispute? Let us help you make informed decisions about your planning. If you think your business may be subject to a dispute from the next generation, contact us today to set up a consultation to discuss your situation.