Most assets in one’s estate, such as investments or real estate, have such intrinsic value that the death of the owner has no effect on them. In contrast, ownership of a closely held business requires special planning if the value of the business is to be protected after the death or disability of the owner.
The term “succession planning” encompasses not only a plan to minimize taxes, but also the softer issues, such as which person in the company fills which role, what is to occur in the event of an emergency (such as the death or disability of the president) and what the guidelines are for promotion of family members to positions of authority.
These issues frequently involve an understanding of the effect of such decisions on nonfamily employees, as well as within the family circle itself. A number of consultants specialize in giving advice to family-owned businesses, and if the engagement reaches that level of complexity, the client may retain one to assist in the process. A CPA and/or financial planner should also be utilized, especially if they have many years of experience with the company.
As with any estate planning service, the first step is for the client to clearly establish his or her goals, without being unnecessarily confused with complicated techniques that may not be used. Once the client’s goals are known, the proper tools can be reviewed and selected. Avoid a cookie-cutter approach, such as insisting that the only way to reach the goal of a transfer of a business is through a family limited partnership.
In general, business succession planning involves three basic questions.
* Who can run the business?
If the current owner is no longer able or willing to run the business, who is best suited to manage it? Does it have to be a family member, and if so, what additional training and grooming are needed?
If it does not, how does the owner give that nonfamily manager an incentive to remain?
* Who controls the business?
This is a different question than who can run the business. The one running the business should be given the title and authority (e.g., president, CEO), but does not necessarily have to have ultimate control. This, of course, resides in the directors and shareholders.
Be creative and flexible in these arrangements. It is certainly possible for family members to retain all of the stock and seats on the board of directors while running the company with a nonfamily CEO.
* Who benefits?
Once the owner has decided who can best run the company, as well as who has ultimate control, the next question is, who benefits from its success? The issue of trusts must also be considered.
Attorneys frequently prepare documents that provide that a business will be owned by a trust after the death of the owner. However, is this practical? Does the trustee want to make the decisions of hiring directors and officers to run the company?
What if it is an institutional fiduciary, which may not want to serve in that capacity? One can readily see the myriad issues that are involved.
Once these basic questions are answered, the owner and the succession planning team can begin to review specific techniques, including:
1. Recapitalization of the company into voting and nonvoting stock
2. An installment sale by the senior generation to the younger generation
3. Private annuity
4. A grantor-retained annuity trust (GRAT)
5. Redemption of the senior owner’s stock by the company
6. Shareholders’ agreement.
Many family businesses fail after the death or disability of the primary owner because there is no plan for new leadership, because of estate taxes or for other reasons. These failures can often be avoided by proper planning by the owner during his or her lifetime.
DAVID L. WATSON s a partner at Gambrell & Stolz LLP in Atlanta. He practices in the areas of taxation, wealth transfer, business succession, probate and business planning. Reach him at (404) 223-2209 or [email protected].