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Category Archives: Family Business Planning
2018 Changes Impacting Estate Planning
Most of us have heard plenty about the changes made to the tax code for 2018 by now. While you may understand that changes in certain deductions and credits may impact income tax, you may have concerns about how the changes may impact your estate planning. Similarly, you may be aware that estate tax exemption amount had increased in 2018 but are not sure to what level and what it means for your personal situation.
For the most part your current estate plan may be sufficient to meet your needs in light of the changes to the law. However, it may be more complex then necessary. It is important to review your estate plan to ensure it allows for flexibility in the event of a subsequent change to the estate tax exemption limits. You want an estate plan to be simple while taking full advantage of the changes and remaining flexible for the future.
First, what are the changes to the law?
Tax Cuts and Jobs Act of 2017
On January 1, 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) became effective. The Act makes significant updates to individual and corporate tax rates, eliminates or modifies many tax deductions and results in changes for estate and business planning. Until such time that regulations are in place, the Internal Revenue Service and tax advisors are still sorting many of the details. Nonetheless there are some key updates that may impact estate planning. For most people the changes will not have a lot of impact on estate planning, but still provides a good opportunity to review their estate plan.
Doubling of the Estate Tax Exemption
One of the most significant estate planning changes for 2018 is the doubling of estate tax exemption amount. While for most people this change will not have a lot of impact on their estate planning, the doubling of the estate tax exemption is quite significant.
Beginning in 2018, the basic estate tax exemption amount increases to $10 million per individual with adjustments for inflation. The IRS has not yet released the inflation adjustment but it is expected that the 2018 exemption amount will be $11.2 million per individual and $22.4 million for a married couple.
Again, this change may not impact most people. However, the change will greatly simplify estate planning for married couples with a combined estate of more than 10 million dollars. Without further congressional action in the meantime, on January 1, 2026, the estate tax exemption amount will revert to the 2017 exemption levels of $5.49 million per individual and $10.98 per married couple. With this in mind, it is important for families with assets exceeding $10 million to plan with flexibility. Often this includes the use of revocable living trusts with certain disclaimer or optional bypass trust provisions.
Increased Gifting Opportunities
The lifetime gift tax exclusion amount also doubled for 2018. The lifetime gift tax exclusion amount is total amount that you can gift during your lifetime without paying gift tax. The new lifetime gift exemption amount mirrors the estate tax exemption amount with an expected adjusted exemption amount of $11.2 million per individual and $22.4 million for a married couple.
With this in mind, it is a good opportunity for those families considering sizable gifting plans to utilize the additional tax-free gift amount while it is available. Since the lifetime gifting exemption is also subject to change it may be advantageous to make additional gifts while exemption amount is higher. By making gifts during your lifetime you can transfer wealth and thereby reducing the overall value of your estate and decreasing your taxable estate.
However, it is important to balance the advantages of lifetime giving with tax basis and estate planning considerations. For example, gifts made during your lifetime will be transferred at your tax basis, or your cost. While distributions of assets through your estate receive a “step-up” in basis equal to the fair market value of that asset upon death. With this in mind, if you are considering lifetime giving you may want to save highly appreciated assets to pass through your estate.
Changes for Pass Through Entities That May Impact Planning
For individuals or families that have rental or investment properties as a part of their overall estate there are advantages to owning these assets through separate pass through entity such as an LLC. Ownership of investment properties through an LLC will provide additional liability protection as well as potential tax advantages.
TCJA changed the tax rate for pass through entities and provides a deduction of up to 20% on qualified business for business income that passes through to an entity to an individual. The modifications to the law and calculation can be quite complicated and are subject to certain limits and restrictions. For example, those with joint income over $315,000 are above the threshold amount and therefore subject to limitations. However, for most pass through entities this change results in a reduction of overall tax.
Another significant change in the law for pass through entities is a change to the partnership audit rules. The update to the law provides for tax assessment and collection at the entity level rather than individual level. This means that if you have assets in an existing LLC, S. Corp. or other pass through entity, or if you are considering setting up a new pass through entity, you need to consider the new requirements.
Practically speaking one of the most significant changes is the requirement to appoint a tax representative for the entity. The tax representative will be the point of contact for the entity in the event of an audit or other tax issue. This involves updating the operating agreement or partnership agreement to include the appointment of a tax representative. For smaller entities, with less than 100 partners or members, you may elect to opt out of these requirements. However, it is important to consult with your CPA to assist you in this process.
If you own a rental or investment property in your name individually, now is a good time to consider transferring your property to an LLC or other pass through entity. However, discuss this with your CPA, attorney and tax advisors first to ensure it is effective for your personal situation.
Overall Considerations
The focus of this entry is primarily on changes that may have an impact on estate planning. However, TCJA made significant modifications to many other tax provisions including reductions in tax rates and changes to many deductions and tax credits. It is important to discuss these updates with your CPA and tax advisors to determine how the changes might impact your personal tax situation.
Even if you think that the 2018 updates to the law may not apply to you, the key to any effective estate plan is flexibility, and regular review of your plan with your advisors. Discuss your estate and gift planning strategies with your attorney, CPA, financial planner, and other tax advisors as soon as possible to ensure you are making the most of your estate plan and gifting strategies.
If you have question regarding estate or business planning contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com
Why Incorporate Your Small Business?
Clients often ask me why a separate legal entity is a good idea for their business. There are many advantages to setting up a separate legal entity, specifically liability protection. For example, consider a small retail business that is structured as a sole proprietor. The business has some initial success so the owner decides to expand the business. They move to a larger location, increase staff, and expand product lines. However, the expansion results in significantly higher operating costs, so the owner decides to take out a loan to cover some of the costs.
Unfortunately, the business gets behind paying the bills and becomes unable to make loan payments. As a result, the owner defaults on the loan and the lender files a collection action to recover the remaining debt. Because the owner held the business a sole proprietor the lender was able to file the action against the owner, personally, rather than just against the business itself. This meant that the lender could seek recovery from personal assets as well as any business assets. Most of the assets and inventory of the business were already purchased on credit so the creditor looks to personal assets to collect on the judgment. This could result in a judgment which encumbers a personal home and can take a significant amount of time to free personal assets from the judgment. If the business had established the business as a corporation, or other separate entity, the owner could have avoided entangling a personal home with business debt.
Consider Your Business Entity Structure
If you own a small business and want to avoid some of these issues, consider structuring your business as a separate business entity such as a corporation or limited liability company (LLC), limited liability partnership (LLP), or other legal entity. For purposes of this article I use “corporation” or “incorporation” to generally discuss how forming a separate entity can be advantageous to your business. However, the decision about the specific legal structure for your business will impact your tax liability, ownership rights, and business operations. Making the right decision about the legal and corporate structure of your business is critical to your long-term success, so discuss your options with your tax advisor and business attorney to determine what is right for your specific business.
Advantages of Incorporating
Regardless of the specific entity type there are some very compelling advantages to incorporating, or otherwise creating a separate entity for your small business. Among the advantages these include:
- Protection of Your Personal Assets
Perhaps the most persuasive reason for incorporating your small business is protection of your personal assets. A corporation is a separate legal entity which means it can own, buy and sell property; enter into contracts; sue and be sued; and be separately taxed. Moreover, a corporation is responsible for it’s own debts and liabilities.
This separate structure protects the owners, or shareholders, as well as directors and officers from personal liability for corporate debts and obligations so long as corporate formalities are properly followed (as discussed below). This means that creditors of a corporation may only seek payment from assets of the corporation and not the shareholders or directors. Without a separate entity structure such as a corporation, business creditors may be able to pursue the owner’s personal home, car, or bank accounts as Mary’s creditors did.
- Ease of Transfer
Ownership interests in a corporation are held in corporate stock. Corporate stockholders can readily sell or transfer their stock. This also means that shareholders can transfer or even give shares of stock to their family members. The ease of transferability allows business owners to transfer a family business to the next generation in a more seamless fashion. It also increases the ability for the business to add new owners or investors.
Alternatively, transferring ownership in a sole proprietorship or partnership can be an expensive and time consuming process that involves transferring title to property, assigning contracts and often setting up entirely new accounts.
- Perpetual Existence
A corporation is a separate legal entity so it is not dependent on the life of any one individual owner. This allows a business to continue indefinitely despite changes in ownership without disruption. This also provides additional stability for owners and investors and avoids the need for an extensive process to transfer or liquidate the business upon the death of an owner.
- Attracting Investors & Raising Capital
When you incorporate your business it is often taken more seriously by lenders or outside investors. If you have taken the step to incorporate it indicates that you may be more willing to invest time, energy and resources in the business to ensure the long-term success in the business. The willingness to invest in the long-term success of the business makes corporations more attractive to lenders and investors.
In addition, corporations can easily raise capital and transfer ownership by selling shares of stock. This makes it easier for outside investors in invest in corporations, and provides the additional piece of mind associated with the limitation on personal liability.
- Potential Tax Advantages
Corporations may provide certain tax advantages over a sole proprietorship or partnership. It is typically easier for corporations to write off expenses such as pension plans, health insurance premiums and other fringe benefits as tax-deductible expenses. Some corporations are also able to structure the business in a manner to save on self-employment taxes. There are numerous ways in which a corporation may reduce its overall tax liability. It is important that any business discuss these issues with its tax advisors prior to incorporating, or otherwise creating a separate entity for the business.
Maintain Corporate Formalities
The advantages of incorporating a small business are numerous. However to enjoy the benefits, especially the benefit of limited liability protection, the entity must act as a corporation. This means maintaining certain corporate formalities such as using the corporate name, holding annual and special meetings, maintaining meeting minutes and filing annual reports. Furthermore, it is essential not to mix corporate and personal assets or accounts or otherwise use corporate assets to pay for personal debts and obligations.
If you incorporate your business, it is critical to know when to seek legal advice to assist you in maintaining a separate entity structure. Legal advice may be especially beneficial when taking actions such as issuing or purchasing stock, performing business in other states, amending corporate documents, or merging, dissolving or otherwise restructuring the business.
A business attorney can advise you how to incorporate your business, as well as discuss the benefits and drawbacks of specific types of legal entities for your particular business. While incorporating your business will not ensure that your business will always be successful, it can enable you to protect your personal assets.
Estate Planning for the Small Business Owner
Most small business owners barely have time to stop to catch their breath, much less think about their estate plans. However, for a small business owner estate planning can be as important as budgeting, forecasting or any other planning.
Why is estate planning important to small business owners? More than likely, if you own a business a large part of your personal wealth is tied to that business. Without a plan you lose the ability to manage the transition of your business, and your wealth. Estate planning enables you to be in control of what happens to your business interest upon your death or incapacity, rather than leaving it to state law, family members, your partners, or even creditors.
Review Your Will or Trust to Ensure it Addresses Your Business Ownership Interests
If you already have a will or trust in place, review it to make sure it addresses your intentions for your business interests upon your death or incapacity. This may include a specific provision in your will that passes your business interest to your spouse, or other family members, or a specific acknowledgement of your business ownership interests and a statement your intent that your family honor the terms of an existing operating agreement.
If your existing estate plan is silent as to your specific business interests, more than likely that means that your business ownership interests will pass with the remainder of your estate. While you may wish that your family receive your business ownership interests, it is important to specifically address how your heirs or family members may, or may not, be involved with your business and its operations.
If You Do Not Already Have an Estate Plan in Place, Make it a Goal for Your Business
Again, estate planning allows you to be in control of the distribution of your business interests, rather than leaving it to state law, or in the hands of your family members, business partners, or other third parties. Estate planning for business owners includes the traditional estate planning tools, such as wills and trusts, as well as internal business planning documents. At a minimum, your estate plan should include a Last Will and Testament and/or a Revocable Living Trust, as well as Power of Attorney documents for financial and health care decisions, and an operating agreement for the business.
Discuss your business transition goals with an estate planning attorney to ensure that your estate plan reflects intent for your business and your family.
Review or Create an Operating Agreement
If you own your business with another partner, or partners, an operating agreement is an essential estate planning document for you, as an owner, and the business as a whole. (For discussion purposes the term “operating agreement” is used here to generally discuss internal documents for the operation of various business types, but a different term may be used for a different type of entity, such as shareholder agreement for a corporation.) An operating agreement is a contract between the owners, and the company that guides the operation and transfer of a business. In addition to estate planning issues, such as death or incapacity, the operating agreement can also address how to determine the value of the business upon a sale, how individual owners may join or withdrawal from the business, or how to handle a dispute between owners.
While most individuals would prefer not to discuss the issue, planning for an unexpected death or incapacity of an owner or manager, an operating agreement will enable the business to carry on, even if an owner may no longer be able to manage the business. It is important that the members or owners of the business have a discussion as to the important points of the operating agreement. This ensures everyone is on the same page and has discussed these issues from a planning perspective rather than trying to figure out these issues in the event of a disagreement or other unknown circumstance. When discussing how to plan for an unexpected death or incapacity of an owner or manager with other owners or with your family consider the following:
• Ownership Transition and Buy-out: Do you want the business to buy-out the heirs or family?
• Control & Management: If the business does not buy-out the heirs, does it want those heirs to have an active role in managing the day-to-day operations of the business? Or any amount of voting power?
• Financing: What resources are available upon death? If the plan is to buy-out the heirs or family members, how will it be financed? Some options may include installment payments, life insurance, or the creation of a separate fund.
• Price: How do you establish a price to buy out? Price can often be calculated as book value, multiple of annual earnings, by appraisal, or otherwise by agreement of all owners.
These are only a few of the discussion points to consider when creating an operating agreement. A business attorney can advise you on options for your particular business and assist you in drafting an operating agreement that meets you needs.
Create a Separate Entity
If you are a solo proprietor, or a general partnership, the beginning of a new year is the perfect time to start thinking about setting up a separate business entity such as a Limited Liability Company (“LLC”) or corporation. LLCs and corporations protect personal liability by placing liability on a separate entity rather the business owners as individuals. Moreover, a entity that is separate from the individual owner(s), survives the death of an owner, which makes it easier for your business interests to be distributed to your family without the need for probate.
The decision about the legal structure of your business will impact your personal liability, ownership rights, and business operations. Making the right decision about the legal and corporate structure of your business is critical to your long-term success, so discuss your options with a business attorney to determine what is right for your specific business.
Communication is Essential to Successful Estate Planning for your Business
The most critical component of successful estate planning for a small business is communication. Talk to your partners, family members, tax and legal advisers to ensure that your intentions can be met and to facilitate a smooth transition for your business. Estate planning for a business owner does not need to be complex or lengthy, but it needs to be discussed and completed. Communication with those involved, along with some basic planning will enable your family, and business to carry on in the event of an unforeseen circumstance.
Don’t wait for the unexpected to happen and then to try figure out what to do next. Take some time to create an estate plan that addresses your business interests and keep the control of your business in your own hands.
How to Keep the Vacation Home In the Family
If you own a vacation home in Montana, you probably have a very special emotional connection to the area, and the memories it creates for you and your family. Since vacation homes have such a unique emotional and familial tie, you likely want to make sure that it stays in the family for generations to come.
However, you also may have worried about what will happen to the family vacation home after you are no longer able to visit. Often questions come up, such as: Who will inherit it? How will I decide who can use it and when? Will my family have to sell it after I am gone? How will my family pay for the taxes and maintenance?
Without proper planning your family’s vacation home can be a great source of disputes, and create financial burdens for your family in the future. Moreover, there are tax and financial implications for transferring your vacation home at different times and though different mechanisms, especially in situations where the home has increased in value.
What Is Your Long-term Vision for Your Vacation Home?
First, it is important to adequately consider your long-term goals for your vacation home. Do you intend to keep in the family for multiple generations? If so, how do you envision the home being shared by your children and grandchildren? How do you plan to pass along your interest in the home? Do you want to pass it during your lifetime, or upon your death?
As an initial matter it is critical that you speak with your CPA or tax planner about the tax implications of transferring real property during your lifetime or upon your death. Everyone has a unique financial and tax situation, and real property transfers are especially susceptible to pitfalls.
If you do not want the vacation home to be sold upon your passing, and want to make sure that the home is kept in the family, without a significant financial burden, consider the creating a separate entity such as a trust or limited liability company (LLC) to own and manage your vacation home. Both trusts and limited liability companies can help to reduce personal and financial risks for your family, plan for financial costs, and reduce conflict. Moreover, trusts and LLCs also have the advantage of preventing unwanted partitions or forced sales.
Create a Trust for Your Vacation Home
There are several different types of trusts you may consider in managing a vacation home, including revocable or irrevocable trusts. Speak with your attorney or tax advisor to determine which makes the most sense in your specific situation. Regardless of the type of trust, a trust can hold the home for the benefit of your family, as well as direct the distribution of the home to your children or grandchildren. In addition, a trust keeps your vacation home out of probate and less likely to be subject to claims of creditors. Moreover, a trust can provide additional funds to be set aside specifically for taxes or maintenance of the home.
A Trust as a Method to Provide Funds to Maintain the Home for Your Family
Adequate funding helps to alleviate some of the financial constraints for your family and help to ensure that the vacation home will stay in the family for generations to come. Your trust can simply set aside funds to pay taxes upon your death, or a lump sum of money to be paid to your children for the maintenance of the vacation home. Otherwise, you could decide to keep the trust ongoing to make annual payments of principal or income to provide for such costs as taxes and insurance for the home.
If you managed to save enough to buy a vacation home, but don’t anticipate that you will have a significant sum of money to provide for the maintenance of the home long after you are gone, you may consider making the trust a beneficiary of a life insurance policy. Upon your death, the death benefit of the life insurance policy will be paid to the trust. Then, these funds can be uses to pay for taxes, repairs and maintenance for the property.
Create a Limited Liability Company to Hold and Transfer Interests in Your Vacation Home
A Limited Liability Company (LLC) can be a great tool for transferring interests in your vacation home to family members, as well as establishing guidelines for the use of the home. In addition, by placing liability on a separate entity rather than an individual, LLCs help to protect your family from personal liabilities, including creditor claims or liability associated with accidents occurring on the home by other users.
Transferring Ownership Through Membership Interests in the LLC
If you establish an LLC for your vacation home, you can transfer partial interests in the home during your lifetime. You can accomplish this simply by gifting membership interests (like shares of stock) in the LLC to each child or grandchild up to the current federal gift-tax exclusion amount every year. This can provide significant tax advantages, and also allow you to maintain a certain amount of control over your vacation home until your death. Again, make sure that you work closely with your financial and tax advisors when gifting interests in your vacation home LLC.
Utilizing an LLC Operating Agreement for the Maintenance and Use of Your Vacation Home
To ensure the success of the LLC for your vacation home, an operating agreement is essential. A well-planned LLC operating agreement will encourage your family members to share in the management and take responsibility for the use and maintenance of the property.
The LLC operating agreement should address the allocation and payment of taxes, maintenance, and other expense associated with owning and improving the vacation home over time, as well as how to decide on maintenance and improvement costs. In addition, the operating agreement should adequately discuss how the property can be used, by when and by whom, and how and when members can transfer or sell their membership interests. Similarly, the operating agreement should set out what to do in the event one member does not pay his or her contribution towards expenses or fails to follow the guidelines for use of the home.
Communicate Your Vision with Your Family & Seek Professional Advice
These are only a couple of techniques to consider when planning for your vacation home. Discuss your goals and considerations with your family members to determine if they are interested in pursuing one of these techniques. Make sure your children want to share in your vacation home and create an overall plan to addresses any potential disputes and financial issues. Once you and your family are all on the same page, then work closely with your CPA, attorney, financial and tax advisors to make sure you have chosen the right technique for keeping the vacation home in the family.
If you have specific questions about any of the techniques discussed in this article, Contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com to schedule an appointment.
Article previously published in the October/November 2012 Business Issue of 406 Woman Magazine http://406woman.com/
Estate Planning for Blended Families
Tips & Techniques for the Modern Family
The idea of the “typical” American family has changed significantly over the last several decades from the traditional nuclear family to blended families of countless variations. Now-a-days, a blended family, or a family where one or more spouse has children from a prior marriage is commonplace.
Blended families face unique challenges when it comes to estate planning. Parents of blended families should take extra precautions to adequately consider what would happen to the family upon the death of one spouse and take steps to avoid disinheriting a spouse or children.
Perhaps one of the more famous estate disputes in recent history surrounded the estate of J. Howard Marshall who was married to the much younger Vickie Lynn Marshall, more widely known as Anna Nicole Smith. Upon Mr. Marshall’s death, his will left almost all of his estate to his son from a previous marriage. However, Ms. Marshall sued, claiming her elderly husband promised to give her more than $300 million and the court battle went on for several years.
This case illustrates one of the more common scenarios in blended families, where one spouse leaves everything to their children from a prior marriage and completely leaves out his or her spouse. This leaves the estate subject to claims from the surviving spouse, as well as other disputes between family members that can have lasting impacts.
Another common problem occurs when the children are disinherited by virtue of joint ownership of property. This commonly occurs because married couples often decide to hold property such as houses, bank accounts, or cars jointly. However, in a family of a second marriage joint ownership with a spouse can result in unintended consequences. In the case of joint ownership, the surviving spouse obtains sole ownership of the property by operation of law, thereby excluding the predeceasing spouse’s children from ownership of the property.
If you have remarried and have children from a prior marriage, what can you to reduce the chance for disputes between your spouse and children after you are gone?
First, it is essential that you talk to your spouse and children about your wishes, as well as discuss potential issues that may arise with the distribution of your estate. In addition to communication with family members, a blended family should consider the following techniques for reducing conflicts:
Update your Estate Plan & Beneficiary Designations
At a minimum each spouse should have an estate plan containing a will with Powers of Attorney for finances and health care. However, a will only goes so far with a blended family. It is also critical that each spouse updates their estate plan and beneficiary designations to ensure that ex-spouses are disinherited or no longer listed as beneficiaries of assets such as retirement accounts or life insurance policies. Then review your beneficiary designations to make sure that the proper beneficiaries are named, and the beneficiary designations fit within your overall estate plan. Remember, a beneficiary designation trumps a will, so keeping your beneficiary designations updated to reflect your current life situation is essential.
Prenuptial or Other Marital Agreements
Perhaps one of the best methods of preventative maintenance for a blended family is to execute a prenuptial or other marital agreement with your spouse that addresses estate planning issues. By clearly defining which assets you want to remain separate after the marriage and which assets you agree will pass to each of your children you can reduce disputes later, Moreover, marital agreements allow you to maintain more control over the how and when your assets are distributed.
Life Insurance Policies
Life insurance can be a great tool for providing for your children, while also providing for your spouse. By specifically naming children as beneficiaries of a life insurance policy it creates immediate benefit to children upon death, rather than having to potentially wait many years for inheritance. With the life insurance proceeds going to children, the remainder of the estate may pass to the surviving spouse, thereby eliminating or reducing potential inequities.
Create a Trust
Consider a joint revocable living trust or Qualified Terminable Interest Property Trust “QTIP” Trust. A QTIP or other trust can provide income and principal for a surviving spouse’s care during his or her lifetime. However, upon the death of your spouse, the remaining assets in the trust can be distributed to your children according to your wishes.
Life Estates
Another option to consider is to provide your spouse with a life estate in your home. A life estate allows a surviving spouse to live in the house for his or her lifetime, but allows the remainder interest in the home to pass to your children.
Talk with your Family & Seek Professional Advice if Necessary
These are just some of the techniques to consider when planning an estate with a blended family. It is critical that you and your family discuss these issues together and have an overall plan to addresses any potential disputes or inequity problems. Your particular estate may also have estate tax or other considerations, so I always recommend seeking the professional advice of your attorney, CPA or financial planner.
These types of estate planning issues may not always be easy issues to talk about, especially with a blended family. However, communication and planning now can provide peace of mind that you are sparing your family from conflicts or hurt feelings down the road.
Contact Kelly O’Brien for more information or questions about estate planning at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com
Transferring Your Family Farm or Business to the Next Generation, Part II
Planning for the Retirement or Unexpected Death of an Owner: Advice from a Montana Business and Estate Planning Attorney
Business succession planning is the process whereby the business, and its owners, to agree in advance to issues such as what consent is required to transfer business interests, to whom may an owner transfer business interest to, or how to determine the value of those interests. Two major considerations in this process are what happens in the event of a death or incapacity of an owner, and what happens upon retirement.
Planning for the Unexpected Death or Incapacity of an Owner or Manager
While most individuals do not want to think about death, planning for an unexpected death or incapacity of an owner or manager will enable the business to carry on even if a key individual in the business may no longer be able to manage the business.
When discussing how to plan for an unexpected death or incapacity of an owner or manager, consider the following:
- Buy-out: Do you want the business to buy-out the heirs or family members?
- Financing: What resources are available upon death? How to finance the buy-out of family members? Some options may include: installment payments, life insurance or the creation of a separate fund.
- Price: How do you establish a price to buy out? Price can often be calculated as book value, multiple of annual earnings, by appraisal, or otherwise by agreement of all owners.
- Control & Management: If the business decides to buy out heirs, does it want those heirs to have an active role in managing the day-to-day operations of the business or simply receive income from the business?
Planning for Transfers of Ownership Pursuant to Retirement
While retirement may seem to be a long ways off for many small business owners, planning for retirement of an owner or manager will ensure that the business has both the funding available and capable individuals in place to handle retirement. Some of the same considerations discussed above also apply to retirement, and in addition the business should consider the following:
- Who Will Take Over Leadership: Decide who will be the successors will be. Identify key individuals who may already have a role within the business. Discuss whether family members may have a role in the business and the potential role of current owners, managers and third parties.
- Timelines & Transitions: Discuss the ideal timeline for retirement and what gaps in management may exist upon retirement. Discuss what training may be necessary and how to accommodate the different skills and interest of those taking over.
Communication is the Key to Successful Business Planning
The most critical component of successful business succession planning is communication. Communication between business owners, managers and all family members involved will facilitate a smooth transition. The business succession planning process does not have to be complicated, a simple discussion of these issues and a basic plan is better than waiting for the unexpected to happen and then trying to come to an agreement about what to do next.
If you have questions about business succession planning, contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com
Transferring Your Family Farm or Business to the Next Generation
Business Succession Planning- Passing Your Business to the Next Generation, Part I: Advice from a Montana Business and Estate Planning Attorney
Montana is a place where family values are reflected in our business practices and many successful businesses are completely family owned. However, many small or family owned businesses do not have an adequate plan in place for passing on the business. Whether considering passing the family farm to the next generation or planning for retirement, business succession planning is essential to a smooth transition for your business and your family.
Today’s entry is the first part of a two part series on business succession planning, in which I will provide a brief overview of business succession planning. Part II will address some of the specific considerations relating to an unexpected death or incapacity, or retirement, in detail.
What is Business Succession Planning?
Essentially, business succession planning is long-term planning for the transfer of your business assets; either to the next generation or to other business partners. Business succession planning is the process of planning for the unexpected occurrences, or the “what ifs,” in business such as an unexpected death or retirement of a partner or manager. It allows the business, and its owners, to agree in advance to issues such as what consent is required to transfer business interests, to whom may an owner transfer business interest to, or how to determine the value of those interests.
The end goal of the business succession planning process is to have a solid agreement in writing that reflects the long-term strategy for the potential transfer of ownership in the business.
Why should you consider business succession planning?
Every business should consider business succession planning both at the initial start-up of the business, and periodically throughout the life of the business. Mainly business succession planning allows the business and owners to have more control of the unknown and unexpected that may come up with the business. Perhaps it is more important to consider what happens without business succession planning. Without it, the business may incur significant losses or the owners may even lose the business due to issues such as liquidity problems, family conflicts or tax issues.
Initial Considerations in Business Succession Planning.
First, if you have not already done so, consider a separate entity for your family or small business. A Limited Liability Company (LLC), Family Limited Partnership (FLP), or other corporate entity is an essential step in easing the transfer of your business to the next generation.
Next, review and discuss the long-term business goals with all of the owners, managers or officers; evaluate the current status of the business and where you want it to be in the future. The most important aspect of business succession planning is clear communication between all involved, which means the business partners, owners, managers, directors, and family members.
A major consideration in this process is deciding and agreeing on who will be the successors. Will it be family members, existing owners or third parties? Especially if you own a business with partners whom are not members of your family, it is essential to make clear, and agree upon issues such as whether or not you may transfer your interests to your children. If a transfer to your children is permissible, then discuss what role your children play in the business and whether or not additional training may be necessary.
In addition, it is important to consider the timeline for transferring interests. If the business owners have agreed to allow transfers to children or other family members, then determine whether or not transfers will take place all at once or incrementally over time. Within this timeline also discuss what training may be required, and how involved family members will be at each phase of the transfer.
During this process, always be mindful of estate and gift tax issues. Speak with your accountant or attorney to determine whether a sale of your business interests is preferable to a gift or bequest. Make sure you understand the tax implications for everyone involved.
Communication about these issues ahead of time will help to reduce conflicts in the event of unforeseen circumstances and ensure the business has the adequate resources to carry on into the future.
If you have questions about business succession planning, contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com