As more and more boomers are getting ready to retire, many are looking at handing down the small businesses that they created. According to Avi Kestenbaum, a partner and co-chair of the Trusts & Estates Department at the law firm of Meltzer, Lippe, Goldstein & Breistone, only 30% of family businesses successfully pass from one generation to the next. This success rate decreases with each subsequent generation. In order for boomers to successfully pass on their businesses, they must focus on proper planning and execution of a succession plan.
A major mistake made with estate planning is not understanding the difference between probate and non probate assets. Probate assets pass under a will. Non probate assets, such as IRAs and life insurance policies, pass by beneficiary designation and/or operation of law. Not recognizing these differences could produce a will that is substantially irrelevant and assets that would pass to someone not intended.
Boomers also need to be sure they understand tax apportionment clauses. It must be determined, if state or federal taxes are due, from which assets these taxes will be paid. The will or trust will have provisions for dealing with this issue.
Another point of confusion when putting together your succession plan is whether or not family should be involved in these discussions. According to Kestenbaum, the answer is “absolutely not”. Parents need to be of sound mind and body when making succession plans. Decisions need to be implemented while the parents are still active so that all of the family involved can get used to the succession plan.
In some cases the business may be passed to a non-family CEO. The most effective way to make this transition is to integrate the new CEO into the business while the parent owner is still active and involved with the business. It is also suggested that the company set up boards or leadership committees, so that no one person has total authority.
Finally, Kestenbaum suggests that parent owners be sure to put together a team of experts to help with all of the planning involved. A strong team would include; an accountant, insurance professional and a banker. Having a strong team can help to smoothly implement a succession plan.
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