Learn about succession planning strategies business owners. 

  • Lack of proper succession planning is a surefire way to lose the family business you’ve worked so hard to create.
  • You can implement a number of business transition strategies to help you maximize your legacy’s ultimate value.
  • As your family and business change, so should your plans for their futures.

Like many owners of closely held family businesses, you’re likely working hard every day to sustain your business and help it thrive through always-changing economic conditions. The last thing you are focused on is how you will preserve your wealth and transition your business to future generations. However, now is the time to ensure that you have a solid business transition plan in place that will not only help your successors take over your company, but also help to reduce the estate tax burden on the next generation.

As a business owner, you can implement a number of succession planning strategies to help you maximize your legacy’s ultimate value.

Reducing potential estate and gift taxes should be a critical component of your holistic succession planning strategy, and there are many types of estate planning tools available that can help you transfer your wealth efficiently. The following four strategies are most relevant to business owners interested in transferring wealth, and they are particularly advantageous for transferring those assets that have the greatest potential for appreciation.

Grantor retained annuity trusts (GRATs)
A GRAT is a popular method of transferring the growth on assets held in trust to future generations at a greatly reduced gift tax cost. When you establish a GRAT to transfer all or partial ownership of your business, you make a gift of company stock (or other business interest) to the trust, pay a tax on valuation that the IRS places on the estimated value of the remainder interest of the trust when the trust is established, and retain an annuity stream for life, or for a fixed term. At the end of the period, the remaining assets pass to family members outright or in further trust. A gift tax deduction is allowed for the actuarial value of the interest retained, so the amount of the taxable gift may be quite small. If the asset growth outperforms the statutory rate used to calculate the retained value, the additional growth is transferred free of gift and estate tax to the trust’s beneficiaries.
The GRAT continues to be a popular planning technique because there is very little downside. The owner is not required to give up interest in the business assets, and even if the business value does not appreciate as expected, the owner is no worse off than he or she would have been without a GRAT.

Please see important disclosures at the end of the article.

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