Business Succession Planning
Business owners typically spend years working, building and operating to achieve success. Often that success is tied to their ongoing presence and dedication. In turn, the family’s livelihood and future depend on business performance. This situation can make retirement and business succession planning complex. That said, a timely and tax-efficient succession strategy is critical to achieving retirement dreams, ensuring long-term financial support for family, and creating a financial legacy. Failure to plan can lead to business interruption or downturn, unplanned transition to new owners, unnecessary debt, and avoidable taxes.
The optimal time to plan for succession is while the business is thriving and new owners can be vetted and selected. Family members or key employees with a shared vision may be ideally positioned to take over. Alternatively, a supplier, competitor or investor may offer to buy shares or assets. Certain legal and tax considerations apply to these various transition scenarios.
Transfer to Family
Transferring business value to family members requires careful planning to avoid tax pitfalls. An estate freeze is often an ideal way to fix the value of an owner’s interest for tax purposes, while allowing other family members or a family trust to enjoy future appreciation. In a typical estate freeze, the business owner exchanges his or her shares for “preferred” shares representing the fair market value of the business. Then, others may subscribe for new “growth” shares at a nominal price. The value of the business owner’s interest is thus “frozen” and will not appreciate further. The preferred shares may carry characteristics that allow the owner to maintain voting control while other family members assume management over time.
If the shares are subsequently sold, the lifetime capital gains exemption (approximately $826,000 in 2016) may be claimed by multiple family members on the sale, given proper timing and strategizing. Alternatively, the owner’s shares may be purchased (redeemed) by the corporation over time, providing retirement income in the most tax-efficient manner.