Planning for a smooth generational transition

By Meg Muldoon

A poorly planned succession has the potential to derail a closely held family business. The lack of a well-drafted plan can cause financial hardship on both the business and the family. Letting the estate plan dictate how a business is passed on may cause issues.

There are several strategies that closely held family business owners can use to ensure a smooth transition.

1. Address the needs of both active and inactive children. Those who spend their careers contributing to the company’s growth and success should be rewarded for their efforts.

2. Recognize the difference between equal and equitable distribution. Business owners should consider the needs of all family members, including their own needs, when developing a distribution strategy. Not every family member has the same needs or wants. It may be best to leave the family business to the active children and other assets, such as investments and life insurance, to the inactive children.

3. Hold a family meeting. Family business succession planning can get bogged down by emotional complexities. A family meeting, moderated by trusted advisers, enables family members to talk through the issues and the roles and responsibilities of all family members, both active and inactive.

4. Obtain a valuation of the business. Basing any transfer, during lifetime or upon death, on a proper valuation helps to limit the chances that the IRS will contest the valuation, which would result in additional estate or gift taxes.

5. Commit to a succession plan. Without a well-designed business succession plan, inheritance of the business defaults to the owner’s estate plan, which often distributes the estate (including the business) equally among all children. Owners should give careful consideration to how the business should transition to the next generation. Once a written plan is created, it should be communicated to all family members.

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