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Succession Planning and the Family-Owned Business

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Updated March 5, 2021

Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.

John and Jane Smith are 60 years old and are the owners of ABC Company, which they started 30 years ago. They would like to reduce their hours in the business as they contemplate retirement.

They have three children; two of which are in the business. They would like to keep the business in the family while ensuring a secure retirement for them. They want to treat all of their children fairly in their estate plan.

This scenario is a fairly common one for family-owned businesses. The fact the Smiths’ have started to discuss their goals puts them ahead. Nevertheless, their work is only starting. They must consider a number of factors as they formulate and implement their succession plan.

Consider exit strategies

Even if their goal is to keep the business in the family, it will depend on whether any of their children have the qualifications and desire to take it over. They also should examine what the best exit strategy for the family would be from a financial point of view. This could mean selling to an outside party or to a group of key employees.

Tax Implications

Without proper planning, ownership transfer of a business can have negative tax consequences. Losing 30% or more to taxes can severely impact the Smiths’ desire of a secure retirement. It is important to analyze each exit strategy, along with the type of transaction (outright sale, installment sale, part gift/part sale, etc) to obtain a tax-efficient result.

Communicate

When developing a succession plan, communication with both family members and key employees is the surest way to avoid problems down the road. Discussing the plan helps avoid uncertainty surrounding the future of the business. In a number of situations, Trust Point, has assisted in the presentation and communication with these groups to help provide an objective view.

Coordinate with estate planning

One of the key issues John and Jane need to address is the transfer of assets to their children. With respect to the company, there are three basic options: 1) Transfer a third of the voting stock to each child. 2) Create non-voting stock to transfer to the child who isn’t involved in the business, and transfer voting stock to the other two. 3) Transfer liquid assets (now or at a later time) to the child not involved in the business.

The question John and Jane need to answer is, are they trying to treat their children fairly or to treat them equally? If the goal is to treat the kids equally, voting stock should transfer to all three. If the goal is to treat them fairly, the last two options deserve some thought. Regardless of the decision, there could be implications for the Smiths’ estate plan. Both plans need to be coordinated if fairness is to be achieved.

Consult with financial professionals

As the succession plan is being formulated, John and Jane need to bring their team of financial professionals into the planning process. Trust Point’s team of experienced professionals brings insights to a variety of wealth-related issues. We have the ability to leverage resources and coordinate with outside advisors on the clients behalf. For over a century our clients have experienced the confidence in knowing that their advisory team is serving as their advocate.

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Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.