Business Succession Planning

n estate planning this phrase refers to planning for the transfer of business ownership and control to the right persons while minimizing the tax cost. The concept usually applies to closely held family owned businesses.                    

In a typical situation a business is owned by a father whose wife will          probably survive him or it is owned by both spouses. They have children who they wish to share equally in their wealth after their deaths. However, not all of the children are able to run the business nor are all of them interested in doing so. The business comprises most of the parents'          assets.

                   

The parents want to retain control of the business up to the date of their          death or at least up to the date of their retirement. After they give up control they want to retain a right to income.

                   

Since the children have to share equally and the business is the bulk of the estate, they will all get an interest in the business. However, maybe only one of them should be put in control. That one, however, may pay him or herself very well and not distribute any funds to the other children. If they are all in control they may fight over the business.

                   

One way to solve  all these problems is for the parents to sell the business          while they are alive. If none of the children can run the business this may be necessary anyway unless plans can be  made to hire a qualified manager. The cash from a sale is easier to divide. On the other hand it (or the securities it is invested in) will be valued at the market in the parents'          estates. Transferring business interests to children allows for some estate tax savings because of using lower values  for tax purposes.

                   

If the children  are going to wind up owning the business then consideration must be given to how it will be structured to allow one or more to run it while the rest are protected. Voting and  non-voting interests can be used to allow equal ownership, but not equal control. Contractual arrangements can be  instituted, such as a shareholder's agreement. This can set          restrictions on transfer of the stock, provide for buyouts, call for income distribution and in general provide a framework for handling a variety of business issues.
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