本文刊載於《休士頓臺灣商會2012年年刊》
譚秋晴(Alice Chen)
For a business owner, one of the biggest legacies to leave behind is the company and business he/she has spent so many hours building. However, at a time when many businesses are struggling just to stay afloat, the idea of creating a succession plan may not be high on the o-do?list. The truth is, without a proper succession plan in place, the business youe worked so hard to build may not survive the absence of its original business owner.
In addition, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (hereinafter referred to as the Act) may present a uniquelbeit, temporary (during 2011 and 2012)pportunity for owners of closely held businesses to review their business succession plans. In doing so, one may consider using some or all of the $5 million gift tax exemption to transfer interests in the family business (or family real estate) to one children.
Although thoughtful succession planning should take place any time during the lifetime of a business, now more than ever, there are benefits to help them come to fruition. Making a commitment to putting together a business succession plan is the first step in the process.
Keeping it in the Family
Once youe committed to formulating a plan, the first question to ask is whether the business should remain in the family or whether it needs to be sold. As simple as this question sounds, most of the time it remains unanswered until it too latesually, because the business owner is required to make an objective assessment of the ability of his or her children to manage the business in one absence. The question becomes even more complicated if the owner has heirs from a previous relationship.
If the decision is made for the business to stay in the family, the next question is whether ownership should be transferred equally among family members or transferred exclusively to those active in the business. The current owner also needs to make an objective assessment of the talent and experience required to carry on a successful business, because failure to address that may result in a business being kept in the family when perhaps it would be better for the business to be sold and the proceeds distributed to the heirs.
Three primary objectives need to be addressed to ensure for a successful transfer to the next generation:
First, pass control of the estate to the ctive?children.
The main objective of planning for business continuity of the family business is to transfer the ownership to the active members of the next generation with the least amount of estate transfer costs. If a successful business owner waits until his or her death to transfer the business, the estate may lack sufficient cash to meet tax obligations, forcing the estate to liquidate the business. This failure to plan could result in an undue financial burden on the business and may jeopardize its future viability.
Transferring the business to the surviving spouse is often thought of as the simplest approach, one being that all estate taxes are deferred until the second death. However, leaving the business to a spouse who has no working knowledge of the business could jeopardize its ongoing success, and even threaten the spouse financial well-being.
Another potential problem is that family friction may arise if a spouse begins to assume a management role formerly performed by the children. Furthermore, the fact that control of the business will not shift until the death of the surviving spouse may act as a disincentive for the children who are active in the business. Even if all of these obstacles are overcome and the business remains successful, the future growth of the business will be included in the surviving spouse estate. This will add to the costs of transferring ownership to the next generation.
Next, plan for the equitable treatment of nactive?children.
It may be hard to accept this suggestion, but the soundest course of action is to work out a means for the business to pass to the children that are active in it. Non-business assets should be used to provide nactive?children with an equitable solution.
Equitable does not necessarily mean equal value. It could be argued that a cash gift is worth more than a bequest of an equal value of closely held stock, since the stock carries greater risk and will generally require the child active involvement in the business.
In many cases where the business is the primary asset, it may be necessary to purchase life insurance in order to provide additional non-business assets that can help meet this objective. This insurance could be owned by an irrevocable trust designed for the benefit of the inactive children. The death benefit could remain in the trust and be used to purchase non-business assets from the surviving spouse estate and thereby, provide cash to pay estate taxes. In this way, the children that are active in the business can receive the business interest and the inactive children receive property of comparable (or at least equitable) value.
Finally, become financially independent from your business.
Owners may often be reluctant to release control of the business all together because their personal attachments and even their personal finances are so closely aligned with the business. Therefore, an owner who is counting on the continued success of the business as a means of funding his or her retirement and future financial security may be understandably reluctant to relinquish control to children or heirs.
That why it essential that attention be given to planning for the financial security of business owners ?in addition to the business and heirs ?separate and apart from the business. For example, business real estate may be held in a limited liability company, outside the business. In addition, greater use of retirement vehicles, qualified and nonqualified, as well as establishment of sound investment programs outside the business would assure a smoother ownership transition when the children are ready to assume control of the business.
Peace of Mind
A business succession plan is a crucial part of any business owner estate plan. Properly arranging a smooth transition of one legacy to the next generation can eliminate unnecessary conflict, which may result in needless estate transfer costs and painful family discord that could jeopardize the survival of the business. Although it may not seem like the highest priority on a day-to-day basis, when it comes to planning for the long-term direction of your businessnd where your business is ultimately headedhe future is now.
Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor.
MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.
This article appears courtesy of Alice C. Chen. Alice is a Registered Representative offering securities, including variable products through MetLife Securities, Inc.(MSI) (member FINRA/SIPC), New York, NY 10166. Insurance and annuities issued by Metropolitan Life Insurance Company (MLIC), New York, NY 10166. MSI and MLIC are MetLife companies. She focuses on meeting the individual insurance and financial services needs of Houston business owners. You can reach Alice at the office at 3700 West Sam Houston Pkwy South, Suite 400, Houston, TX 77042 and 713-577-1155.
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