Business succession planning is key in Connecticut

Few issues loom larger than succession planning for small and family-owned businesses. Passing a business on to younger generations is notoriously difficult without proper planning. It can take years of meticulous preparation and leadership training and must often be updated. Too often small business owners delay creating a succession plan or rely on outdated agreements with partners. Not only does this make a business transition more difficult, it can harm the owner’s estate beneficiaries or devalue the assets of a business.

Initial steps

The first step a business owner must look to for succession planning is to decide:

  • Who the business should go to
  • What part of the business should go to whom

While this may seem obvious, it is the basis for all legal and financial succession planning. The structure of the business and potential recipient(s) will be the most important part of deciding how the succession should work. For example, business owners may have a child own the business but under management groomed by themselves. Two children who play large roles in the company could obtain more share of the company than one with less involvement.

Structure of the business

If the business is a limited liability company, partnership or corporation, there may already be provisions in place regarding passing ownership shares. For example, a common provision is that upon death a shareholder or owner the interest goes to his or her next-of-kin. However, different provisions may apply, especially regarding voluntary retirement. A buy/sell agreement may allow other stakeholders in the business to purchase a retiring owner’s share. While appropriate in many instances, potential pitfalls of a buy/sell agreement include not being able to reduce an estate through gifts of the business shares.

Different legal tools to accomplish goals

A buy/sell agreement is not the be-all and end-all of business succession planning. Depending upon the circumstances, the following (more sophisticated) tools may be appropriate:

  • Grantor retained annuity trusts, which are irrevocable trusts that can potentially reduce estate and gift taxes by subtracting the value of the property transferred into the trust. The creator’s estate is thereby reduced while still providing income to the creator by allowing income payments from the retained assets. GRATs have qualifying restrictions and this is only a brief overview of this type of trust.
  • Private annuities, which is the sale of certain property or a business in exchange for lifetime payments – because it is a sale, not a gift, it can reduce the estate of the original owner of the business. Other tax consequences can apply with private annuities.
  • Family limited partnerships, which operate as traditional limited liability partnerships only involving family members. Over time the general partner transfers the interest to his or her family as limited partners. Family limited partnerships may also allow for fewer estate taxes under certain circumstances.

Discussions and planning help

Business owners without a succession plan should immediately contact a business law attorney to discuss their legal and financial options.

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