According to a Kent State’s Succession Planning Workshop in 2012, more than 70% of privately-owned businesses will change hands within the next two decades. This statistic can’t be ignored. I won’t pretend to give a complete discourse here on estate planning for businesses, but I want to make several key points:
1. If you fail to take action, you create problems for your heirs
The same study reported that 80% of businesses do not have any succession plan. While these stats were derived from a look at small businesses in Cleveland, OH, I don’t think owners here are unique; owners across the country may also lack any plans.
Do your heirs know what to do with your business? Continue to run it themselves, or bring in outsiders to do this? Sell it? Without a succession plan in place, your family may be forced to make decisions at a vulnerable time in their lives (after all, you’ve just died and left them with a problem).
Even more problematic, is the potential for family disputes over what happens to the business. This may occur whether family members are already involved in the business while you’re alive, or jump in after your death. Take the sad case of renowned jeweler Harry Winston’s estate where his two sons fought for decades over control of the business, and caused the value of the business created by Harry over 40 years to be diminished dramatically. Do you want this for your business?
What do to? Make a plan! Doing this while you’re alive is better than waiting to provide details in your will.
2. Estate tax matters have become simpler
Not too many years ago, business owners were acutely aware that if they didn’t make estate plans for their business interests, their families would be put into a difficult position. Because federal estate taxes are due 9 months after death, businesses would, in a number of cases, have to be sold at fire sale prices for this purpose. Now, the federal exemption is high; it’s $5.45 million for estates of those dying in 2016. This exemption applies to taxable amounts (i.e., after deductions).
But the federal estate isn’t the only concern. Many states impose some death tax, and the exemption amount may be lower than the federal exemption. The good news is that a number of states have increased the exemption amounts for 2016 and beyond. For example, starting in April, the New York exemption increases, and in Maine the exemption is now the same as the federal amount. Even better, Tennessee eliminated any estate tax.
However, if the value of your business, plus your other assets, is higher than exemption limits, meet with a tax advisor who can discuss ways to minimize the tax bite on your business.
3. Start now to get new leaders ready for the business
According to that Kent State workshop, 20 years ago 30% of businesses made it to the next generation. Today, that statistic has declined to 15%. One explanation for this is that the next generation simply isn’t qualified or prepared to the run the business. Where the next generation has the interest and the talent to run the business, this problem can be addressed by bringing them in and providing training.
It can be fostered by hands-on activities, also, which may require an owner to back off and let the next generation take the reins in whole or in part. Many owners are loathe to do this; it may require working with a family business advisor to bring consensus among all parties involved.
Maybe you think like Louis XV that after you die who cares what happens (“après moi le déluge). However, it’s hard for me to imagine any business owner who’s put in time and money to build a business would want it all to fall apart after death. Giving due attention to succession planning can ensure that your business lives on.