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A Better Partnership


Feb 2006
February 17, 2006

What Businesses Should Know About -- Business Succession

Building a business takes ingenuity, intelligence and hard work. Preserving a business upon the death or incapacity of a principal owner requires the same thoughtful, advance planning. Because the directions given in your estate plan will directly impact the continuity and success of your business upon your death or incapacity, estate planning should be a part of your business plan. Consideration should be given to:

  • Who will vote your business interests upon your incapacity or death? This would normally be the personal representative of your estate or trustee of your trust, and could be one individual, a group of trusted advisers, a bank or other professional. The voting shareholders of a corporation control the board of directors, who in turn elects the officers of the corporation. The voting shareholders also control decisions such as whether to sell or liquidate the corporation.

  • Who will manage the business and make day-to-day business decisions upon your death or incapacity? Normally this is the president or other officer(s) of the business, in conjunction with the board of directors. These persons may be different from those who will hold your voting stock. Are these individuals ready for the task, or do they need additional training?

  • Whom do you want to inherit your business upon your death? Only those family members who are working in the business, or all family members, regardless of employment in the business?

    Strategies are available to allow the value of the business to pass equally to all, but to retain management control only in those employed with the company. Or, if the business is to pass only to those employed with the company, do you have other assets available to equalize the inheritance of non-employee family members?

  • Should you begin transferring business interests to descendants or others now? Lifetime giving has two key advantages. First, generally you are able to transfer the business during your lifetime with less tax, which reduces the risk that the business will be jeopardized upon your death. Second, giving descendants an ownership interest in the business has an important psychological impact: they are owners rather than just employees.

    Receiving ownership during lifetime tends to change the way they think about, and interact with, the business. Doing this gradually allows you to provide important insight and knowledge to the younger generation about the operation of the business.

  • Should the business interests pass outright to your heirs, or be held in trust? Using trusts allows you to have voting control in the hands of the trustee, while passing the financial benefit to the beneficiaries of the trust. This can be particularly beneficial if your children are not yet capable of running the business themselves.

  • Will your estate have the cash resources available to pay estate taxes without having to sell the business? If you are like most business owners, you have reinvested your resources in the business, and the bulk of your wealth may be tied up in the business. You should have your attorney or accountant review your liquidity to determine whether you will have a cash shortfall. Life insurance may be recommended to fill any shortfall.

    Beginning January 1, 2002, every U.S. citizen can pass $1 million of assets free of estate or gift taxes to a non-spouse. Spouses can pass unlimited amounts to each other, and you can also pass unlimited amounts to charity. Thus, with proper planning, a married couple could pass $2 million free of estate taxes to their heirs. Without proper planning, however, a married couple may be limited to passing $1 million estate tax free.

    Estate taxes are due nine months after death. If you own a business and it accounts for 35% or more of your gross estate, you can elect to pay the estate tax in installments. Estate tax rates range from 37% to 50%, depending on the size of your estate. For example, a $2 million estate passing directly to children (if no surviving spouse) would incur estate taxes of approximately $345,800 in 2003.

  • Do you have a buy-sell agreement or other agreement that addresses your business interests upon your death or incapacity? If so, it must be carefully coordinated with your estate plan to ensure that there are not unintended results. A buy-sell agreement not only restricts to whom your business interests may pass upon your death, but will also fix the purchase price for your interests if there is a purchase of your interests upon death. The purchase price may differ from the value that is taxed in your estate, which could lead to a cash shortfall for estate taxes. This is particularly true if the agreement sets the purchase price at net book value.

These are not easy issues to tackle, but upon your death or incapacity they will be resolved, with or without your input. If you die without a will, the state of Michigan writes a will for you and directs who will receive your estate, in what proportion and at what age (typically age 18). Without proper planning, surviving families can be caught unaware and uninformed of your desires and intent. Giving advance thought to these issues greatly assists survivors coping in unfamiliar territory during a very stressful time and can create the environment to maintain a healthy family and business.

If you have any questions, please contact Susan Meyers at 616.752.2184 or your WN&J attorney.


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