After decades (or generations) of building an entrepreneurial success, it’s difficult for many to consider stepping back. However, change (like death and taxes) is inevitable. Thoughtful preparation allows for continuity, tax efficiency, and the protection of assets.
Start Early, Revisit Often
Succession planning should start long before retirement. Early action enables leadership development, knowledge transfer, and resilient agreements that withstand foreseen and unforeseen events. Regular reviews keep plans aligned with evolving goals, family dynamics, and legal landscapes.
Consider Personal Planning
Business owners can benefit from transferring shares during their lifetime through annual exclusion gifts or the estate and gift tax exemption. Employing valuation discounts for lack of control and/or marketability can further reduce the taxable value of transferred interests.
Integrate Tax and Estate Planning
There are many tax and estate planning tools that will maximize the tax efficiency of transitioning a closely held business, including grantor-retained annuity trusts, spousal lifetime access trusts, intentionally defective gift trusts, and family limited partnerships, to name a few.
Additionally, incorporating a revocable living trust and an irrevocable life insurance trust in the estate plan helps avoid probate, protect assets, and provide liquidity for estate taxes, keeping the business solvent during transition.
Develop Key Talent
Successors may be family members, internal leaders, or external candidates. Incentive plans like deferred compensation agreements, employee stock options, buy-sell agreements, and gifting strategies can help retain key talent, reduce tax burdens, and promote smooth transitions.
Communicate the Plan
Open dialogue with all parties builds trust, while silence can lead to conflict. Though families may resist transparency, having difficult conversations helps avoid conflict and misunderstanding while building trust and ensuring alignment.
Whether you realize it or not, a succession plan exists. If not legally formalized, default statutes will control, often with undesired results. Planning is essential for a successful transition.
For more information or to seek counsel from our Trusts & Estates group, please reach out to request a consultation or call us at 216-696-1422.
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*This article was originally authored for publication in Crain’s Cleveland Business. To view this article on the Crain’s Cleveland Business website, follow this link.
