To say that the year of 2022 has been challenging is an understatement. I don’t need to even want to list them at this point. What we would like to focus in on are business owners.
We meet with and speak to many owners and the one topic that never seems to have an answer or a defined process is succession planning.
With that being the case, we decided to put together a “must have” list of questions that business owners can really help them so they can have answers to this complicated topic.
Here are the top 12 questions business owners must answer.
Has the business owner selected a successor? If yes, has the owner shared the selection with the other family members, co-owners, employees and key customers?
Is there a formalized plan for successor ownership and has an attorney presented a written buy-sell agreement? If yes, do the terms of the agreement clearly detail how each owner’s interests in the business will be distributed in the event of a disability, retirement, bankruptcy, divorce or death of an owner? If there was a buy-sell, is it over 10 years old and needs to be updated?
Do the business owners have a current business valuation, prepared by a competent valuation expert, for valuing each owner’s interest in the business? If yes, is the pricing formula fair to all parties? Does it include the value of goodwill?
Are children of one or more of the owners involved in the operation of the business?If yes, what financial arrangements have been made to provide for the children who are not active in the business upon the departure of the business owner?
Would transitioning the business at retirement to surviving family members or other owners, possibly by an installment sale, cause a business owner to become financially dependent upon the future success of the business to maintain his or her standard of living?
If the business has selected a successor, when will the baton be passed and what obstacles might prevent a smooth transition?
What knowledge about the management and operation of the business should the current owner share with the successor and at what point in time?
What employment options are available for members of the owner’s family who do not take an active role in management or operation of the business?
Does the current estate plan of the business owner distribute the business in equal shares to all children, whether or not they are in the business? Is this fair to family members who are active in the business?
If the family business is to be distributed only to children who work in the business, are sufficient liquid assets available for distribution to a deceased owner’s surviving spouse as well as children who are not active in the business?
Are there unstable marriages among the business owners family or family members who are active in the business? If yes, what would be the effect of a divorce, and could ownership be diluted by having an owner’s interest in the business exposed to division as marital property in a divorce settlement?
Has the owner’s legal or tax advisor reviewed the buy-sell during the past five years? If not, the provisions may be outdated or ineffective, especially for intrafamily transfers of the business.
This is not a complete list, however it is a great start to move in the right direction for all interested parties.
(Another helpful article is How Business Owners Can Achieve Larger Tax Deductions and More Retirement Savings)
Beyond these questions there are other areas like estate planning that needs to be considered.
Estate Tax Exemption
-2022 Federal Exemption: $12,060,000 (adjusted for inflation)
(40% tax rate)
-2022 Illinois Exemption: $4,000,000
(~16% tax rate)
-Federal exemption to be reduced in 2026
There are many estate planning options to be considered.
- Irrevocable Life Insurance Trust (ILIT)
- Annual Exclusion Gifts and Leveraging Your Unified Credit
- Family Limited Partnership (FLP)
- Life Insurance and Qualified Plans, Profit-Sharing and or Cash Balance Plans
- Charitable Planning
- Qualified Personal Residence Trust (QPRT)
- Grantor Retained Annuity Trust (GRAT)
- Sale to an Intentionally Defective Trust
- Family Trust for Spouse and/or Children
- Generation Skipping Trust
- Education Trust
As you can see, there are many specialized areas that business owners need to address with experts in each area to help them navigate the best process for now and in the future.
Related: Helping Attorneys Accelerate Retirement Savings and Reduce Their Tax Burden