Business succession planning simply means choosing who will inherit a business and how they will receive it. Rarely do closely-held businesses have succession plans built into the organizational documents. This means that business owners must plan the transfer of their business with an estate planning attorney. A proper business succession plan should take into consideration estate tax, best organizational structure for seamless transition, and how family members will be compensated.

An estate planning attorney can help a small business owner map out a plan for the future, including contingencies for retirement, disability and death. Without some direction the business can fold upon the owner’s death, assets can be distributed according to statute instead of preference, and opportunities to protect and pass on savings to family can be lost. 

Small business owners need a power of attorney in place or a trust to designate someone to take over operations in case of incapacity. A Will or a Trust must lay out what assets go to whom. There are trusts and organizational structures to ensure a smooth transition of ownership upon retirement or death.  

To illustrate, John inherited his family’s gas station and he and his wife Laura ran it for 25 years. They had four children, two of whom are estranged. John passes away without a will and very little liquid assets.  Since the business was in his sole name, his wife now has to split it with their children – either buying them out or handing over half the profit to them. Moreover, Laura has no legal authority to continue to run the business without going through the Surrogate’s Court. This was likely not what John wanted – he wanted to pass the business to his wife and then to the kids (or at least 2 of the kids). 

Stories like this abound in the small business community. There are several solutions to this scenario, one of the simplest was to place the business in a trust and name a co-trustee or successor trustee to avoid family conflict and the courts. 

Whether as a business owner you need a trust or a Will depends on your succession plan and corporate structure. A trust, as opposed to a will, provides a seamless transition that sidesteps the courts, which could be necessary if you have a business or income producing property in your sole name. If an executor has to wait months or years to go through probate to get the authority to run or sell your business, it may fold well before then. 

A Family Limited Partnership (FLP) is a limited partnership structure to hold family businesses, real estate and investments. The FLP provides creditor protection and efficiently transfer wealth between generations, and shift income tax burdens.  The general partners maintain control over the management of assets and limited partners buy shares in exchange for shares that generate profit.

Business or “key person” life insurance is purchased and paid for by a company or partnership to insure the lives of owners. The company receives the insurance payout upon death, which is then used to “buy-out” that partner, thereby providing proceeds to the family. Key person life insurance also funds a buy sell agreement in case of death, disability or retirement. The life insurance payout can also be used to pay off debts, bide time to find a replacement, pay severance or otherwise provide capital to wind down the business. 

An Irrevocable Life Insurance Trust (ILIT) moves money out of your estate to reduce NYS estate taxes and could provide liquid assets for a closely held business upon death of the owner. It could also be used as liquidity for a child who will inherit the family business to buy out siblings.