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.

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Start Succession Planning Early

Planning well in advance allows business owners to explore various tax-efficient strategies. Early planning helps mitigate potential tax liabilities and provides ample time to implement changes.

Utilize Family Gifting

Transferring ownership through gifting can be an effective way to reduce estate taxes. The IRS allows annual tax-free gifts up to a certain limit per recipient, which can be used to gradually transfer ownership to family members.

Establish a Trust

Trusts, like Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts, can be utilized to transfer business assets during life while minimizing gift/estate taxes. These trusts allow appreciating assets to pass to beneficiaries with reduced tax consequences.

Employee Stock Ownership Plan

An employee stock ownership plan (ESOP) allows business owners to sell their shares to employees, providing tax benefits such as deferral of capital gains tax and no entity-level tax. ESOPs can also enhance employee motivation and retention, ensuring the company’s legacy continues.

Plan for Capital Gains Tax

When selling a business, understanding the capital gains tax is crucial. Structuring the sale as an installment sale can spread the tax burden over several years, potentially lowering the overall tax rate.

Engage Professional Advisers

Consulting with a team of tax advisers, estate planners and legal professionals ensures that business owners are aware of the latest tax laws. This helps to tailor advice and maximize tax efficiency.

Effective business succession planning requires a proactive approach to managing tax implications. By utilizing these strategies, business owners can ensure a seamless transition while preserving the financial health of their enterprise.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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In celebration of National Small Business Month, we proudly recognize the contributions of small businesses in our community. McCarthy Lebit is committed to supporting entrepreneurs and business owners with trusted legal guidance through every stage of their journey, from formation to growth and beyond. As a law firm deeply connected to the small business community, we’re proud to serve as trusted advisors and advocates for business owners throughout the region.

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Going to Market: Pros & Cons

The classic example of family business planning is going to market, or preparing for a sale or transition to new ownership. On one hand, sales of closely-held businesses are influenced by latent issues of valuation, financing, and other potential pitfalls. On the other hand, a sale provides a direct injection of liquidity, unlocking wealth and helping owners transition into another phase of life. A sale may be best for those who want to get out of a business and pursue new endeavors.

The business could also continue operating in the family — even without the daily operations of legacy owners. The power of restructuring allows legacy owners to step back from the day-to-day, remain involved, and add flexibility. Restructuring is an option for businesses with a strong management team that can continue profitable operations.

Customizing Your Transition

Transitioning the family business takes many forms. Advisers have a diverse set of tools and strategies to customize succession plans for different businesses. By keeping an eye toward tax, business and corporate considerations, they assist business owners in navigating the complexities of such changes. Transitioning could be from legacy owners to current management, intra-family or even a hybrid — all bearing unique considerations. Transitioning the business may be best for those owners looking to pass an income-producing asset onto future generations.

Navigating Your Options

Succession planning for the family business takes one of three main forms — selling, holding, or transitioning the business. In all circumstances, legacy owners can guard their visions with creative, yet comprehensive planning to keep their assets running in tip-top shape.

To seek counsel from our Business & Corporate group, please reach out to request a consultation or call us at 216-696-1422.

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