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Your business deserves an “estate plan”

Originally published by Raymond James.

Drafting a succession plan now can help your business stand the test of time.
As a business owner, you’ve invested so much into making your business successful – hard work, time, money, and energy. It’s truly hard to imagine your business without you. But chances are there will come a day when someone else will take the reins. And a seamless succession plan, one carefully and thoughtfully devised well in advance, is essential to making sure your business enjoys continued success for generations to come.

Harder than it sounds

The facts are a bit grim. Only 30% of privately held businesses survive into the second generation, and less than 15% survive into the third, according to Nuveen Investments. However, a well-planned transition strategy can help support your business’s longevity.

For many hardworking business owners, succession planning represents the notion they can be replaced – a pretty uncomfortable scenario. Perhaps that explains why only a third of business owners surveyed for the 2018 U.S. Trust Insights report on Wealth and Worth had established a formal succession strategy.

But in the manner estate planning seeks to protect your loved ones and assure your wishes are carried out as you intend, a succession plan does the same for your business if for any reason you are no longer there. In short, it’s designed to safeguard your legacy.

A thorough succession plan considers not only your exit from the business but also your retirement needs and personal estate. It provides for an orderly transition of management and the passing of control of the business. It also avoids the potential pitfalls of loved ones having to make difficult decisions during stressful times, or leaving the future of your business to happenstance.

And it’s never too early to start thinking things through.

With your professional advisors, consider these questions:

  • How can you protect your business and benefits in order to hedge catastrophe and ensure future continuity?
  • With retirement on the horizon, how can you gracefully exit the business and realize the maximum value for your hard work?
  • What if something happened to you unexpectedly? Have you created an effective contingency plan that protects your staff and customers?

You may want to groom an heir from within the family, groom someone outside the family, consider an outright sale, or have an expert take over until your chosen heir is old enough or fully prepared. Any one of those scenarios takes time to develop.

Succession strategies

The financial implications of business succession are complex, but you and your financial advisor can tap into several strategies to help you refine your plan.

Here are a few examples:

  • Sale to intentionally defective grantor trust (IDGT) – Don’t let the name throw you off. A sale to an IDGT is a sophisticated planning strategy to transfer assets from one generation to another while minimizing income, estate and gift tax liabilities. Families with closely held businesses structured as partnerships or S corporations may find it particularly helpful as they smooth transfers to your heir without incurring gift or capital gains taxes on the sale and shift the value of the assets out of the grantor’s estate.
  • Grantor retained annuity trust (GRAT) – A GRAT can help insulate assets that you expect to appreciate significantly from being overly taxed and can create a meaningful difference in net proceeds for business owners contemplating a sale or transfer. This is one technique that can transfer wealth with little practical impact on the underlying transaction, yet with substantial wealth transfer results.
  • Self-canceling installment note (SCIN) and intrafamily loan – When you use an SCIN to finance the sale of your business interest, the buyer promises to make payments of portions of the sale price to you for a specified period of time. If the seller dies before payment in full on the note, the note is canceled, and no further payments need to be made to the seller’s estate or beneficiaries. Selling a business interest to a family member in a lower tax bracket using an SCIN may allow for a reduction in overall family tax liability. An intrafamily loan can be used in coordination with an SCIN.

Putting a plan in place means you and your business are prepared come what may, even in the case of disability or an untimely death. But it’s not just about being prepared in an emergency. It’s about sustainability.

While these can be difficult conversations to have with family members and business associates, they can actually bring comfort – knowing everyone is on the same page when it comes to the future success of your business.

Source: Nuveen Investments

Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.


Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. OnPoint Community Credit Union and OnPoint Investment Services are not registered broker/dealers or registered investment advisers, and are independent of Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc.

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Any opinions are those of OnPoint and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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