Family Business Planning- How to manage a smooth transition

Consider all the effort that you and your family put into growing your business. That you have been able to serve your community by providing a good or service to them for many years it’s something to be praised. Additionally, that you were able to build this business with your family is another commendable part of our story. Working alongside your siblings, spouse or children creates an atmosphere where you all can share in one another’s successes. Your family succeeds when the business succeeds and vice versa.

Now you have reached a point where you are starting to think about the next stage in your life. It may be that you are approaching retirement age and want to begin transitioning the business into the hands of your son or daughter. Or you may be middle-aged and simply want to attempt to start another business. Whatever your situation is you must have a plan and act intentionally. This can help avoid many problems associated with transitioning to a family-owned business.

In today’s blog post from the Law Office of Bryan Fagan, we are going to discuss transitioning your family business. Specifically, how can you use different estate planning techniques to assist that transition? Having a vague idea of who is going to be calling the shots once you depart is not good enough. For the benefit of your family and your customers, you need to be able to effectively transition your business. Today’s blog post from the Law Office of Bryan Fagan will help you do that.

Growth in your small business

It seems like any business that is not a major corporation tends to be called a small business. Many business owners enjoy serving their clients or customers at the size where they presently are. However, the reality of business is that your operation needs to grow to stay viable. Very few companies or firms succeed remaining around the same size. Keep in mind that with increased costs of doing business, inflation, and other factors a stable business is a shrinking business.

Because you are committed to serving your clients the business needs to have a plan geared towards growth. Working ethically and serving those around you is a worthwhile goal to have. However, you need to also be able to picture how the next stages of your company’s life cycle look. This is something that you owe not only to your family but to your customers. If you have a dedicated customer base, then they have come to expect a certain level of performance from your goods or services. Not factoring growth into that analysis does no one any favors.

Transfer to Next Generation 

Many small business owners are mothers or fathers. If you are a parent who owns a small business, then this blog post is especially for you. Being able to understand better what your responsibilities are as a family business owner as a part of the growth and development process. For instance, in your mind, you likely have a vision or idea of what the transition to your children will look like. However, have you thought about what that plan looks like practically speaking? If not, then you have some planning to do. Fortunately, by being intentional about these challenges and opportunities you can create a plan that suits your family and customers well.

This may look like having a frank discussion with your children. For instance, who do you envision guiding the business in the years to come? It could be that the next person in line is a family member. If so, consider discussing it with that person. Do not assume that he or she agrees with you when it comes to the business. Rather, you need to make sure that this person is in favor of taking the business over.

Finally, begin to map out the specifics of the transition plan. How many years are you going to stay a part of the business? What are some benchmarks or guideposts that need to be reached before you fully leave the company? How can this person better assist that transition process? Ask yourself these types of questions before you begin to engage with him or her on any specifics. The responses you receive will help determine how viable your plans are in the first place.

Estate Planning at the Law Office of Bryan Fagan

Estate planning mechanisms, such as trusts, play a major role in detailed family business transition planning. When you consider that creating a will or trust is one of the most responsible things a person can do for their family the same can be true for a family-owned business. A will allows you to maintain autonomy over how your property is divided upon your death. As a small business owner, you own no more valuable property than your business. Being able to determine how your business is handled after your passing is a major part of this.

Additionally, you also need to be aware of the liability presented by business ownership. Indeed, owning a small business is not only about opportunities and profit. Rather, depending upon the type of business you operate there is a moderate amount of risk which comes with owning that business. As such, you need to be able to account for that risk when succession planning. Those risks can be attended to in various ways through estate planning. The formation of your business, trust creation, and other mechanisms are available to you and your family for consideration.

Lead estate planning attorney at the Law Office of Bryan Fagan, Megone Trewick, is adept at helping small business owners develop a succession plan. What that succession plan looks like is completely up to you. Ms. Trewick and our team know how to present information clearly and concisely. From there, you are better able to make decisions that benefit your family now and in the future.

What does succession planning look like?

Succession planning may look differently for you than it does for any other business owner that you speak with. The reason is that you may have different goals. For example, are you focused primarily on keeping the business in your family? Or are you willing to consider outside ownership and management? This will help you determine whether the succession plan you create has as much to do with creating outcomes that involve your immediate family. If not, the focus of your succession plan may have more to do with finding a viable outside party to take over management. This is something that you need to spend some time considering. 

Additionally, as with any other decision that you make regarding your business you need to determine what the current business climate looks like. For example, you may own a business that has the possibility of becoming unprofitable or unviable in future years. Automation and artificial intelligence are realities for your consideration. Whether we like to admit it or not, these are issues that are potentially impactful for each of us. Rather than creating a succession plan, you may need to consider a plan to sell or otherwise liquidate your business. 

Of course, these are general thoughts for you to ponder. Without knowing anything about the specifics of your family-owned business we cannot provide any advice through this blog post. That said, if you have questions about managing a small business transition then please do not hesitate to reach out to the Law Office of Bryan Fagan. We offer free-of-charge consultations six days a week where your questions can be answered with information that is specific to your circumstances.

Family business planning using trusts

Creating a will for yourself is a good start to your estate planning journey. However, investing in yourself and your business beyond a will is also a good idea. Consider which of your family members work within the small business. 

For example, if your son and daughter work within your business that is a common scenario for many families. However, if many family members of yours stand to inherit property from the business but do not work in the business that should also be considered. You may need to account for the specifics of small business transition within your estate planning documents. The last thing you want is for the law to require property to be passed to individuals who have nothing to do with the operation of the business itself.

The better your transition plan the fewer external costs there are passed on to your customers. Taxes, costs, and delays are all relevant factors when it comes to creating a plan for transitioning your small business. Ultimately, a transition plan that accounts for your goals and the needs of your family is most important. From there, you are better able to serve your clients and customers in a way that is consistent with your operating principles. Working with an experienced estate planning attorney can help guide you during a transition phase such as this.

Revocable trust creation

Are you interested in minimizing taxes and other costs associated with the transition of your family business? I imagine that every person reading this blog post answered in the affirmative. Well, placing your family business into a revocable trust is a way to do this. In creating the trust, you would be designated as the grantor and trustee. A trustee can control and manage all aspects of the business. Even though the trust is created you would not be giving up on your ability to operate and manage the business as you see fit.

However, were you to pass away or become disabled then your trust could contain orders related to who should manage the business. Additionally, the trust can even contain instructions on how the business should be operated. For instance, you may choose to create a group of people who would operate the business in your absence. Any planning in this regard should be done well in advance. While it is possible to plan a trust while you are creating it the bulk of the work should have already been accomplished. This allows you and your attorney to focus your intentions on creating a trust that accomplishes your desired goals.

Avoiding probate and minimizing delays

Were you to pass away or become disabled a major concern many people would have in your position relate to costs associated with the probate process. Passing away without a will or trust in place means that your state would need to go through probate. This includes matters related to your small business. However, when you have a revocable living trust that would help you to avoid going through probate. The costs and delays associated with probate court are well known. Your business is in flux all the while that probate administration is occurring.

Having a revocable living trust allows you to manage and control the business while you are alive. Once you pass away or become incapacitated persons of your choosing can step into the fold and take day-to-day responsibility for running the business. All the while, your family members can reach a certain age where they would be able to manage the business themselves.

Additionally, revocable trusts are also potentially helpful in your situation. Consider that an irrevocable trust can be used to freeze the value of assets. While Texas does not have a state estate tax, you may be subject to federal estate taxes. An irrevocable trust can help minimize exposure to federal estate taxes and other costs associated with this process.

A hypothetical example to illustrate the benefits of an irrevocable trust

Let’s suppose that you are a person of a certain amount of wealth. As a result, you are concerned about federal estate taxes. Let’s create a situation where we can illustrate the benefits of an irrevocable trust concerning federal estate taxes.

You are the owner of a family business. You place all your ownership of the business within an irrevocable trust. The money value that is placed into the trust is frozen when it comes to the federal estate tax. Even if the value of the property in the trust grows the taxable value is set at the amount originally placed into the trust. Any growth in the property’s value while in the trust would be done tax-free.

Using a partnership to plan a business transition

A lesser-known tool to plan for the transition of ownership in a small business is a family-limited partnership. You can act as the general partner and gift your business interests to a limited partner. You would still be able to own and control the day-to-day management of the business. All limited partners created in the partnership would have equal interests in the business.

As a general partner, you would be able to determine whether income or growth in the business would be distributed to the limited partners. The alternative would be that the business can retain those earnings. Doing this allows you to shift tax burdens onto the limited partners when it comes to the federal estate tax.

Earlier in today’s blog post we discussed how to handle situations involving family members who work and don’t work within the business. A partnership allows you to provide greater benefits to those limited partners who work within the business. For instance, you may determine that the family members who work within the business should be assigned greater financial benefits and property rights compared to family members who do not.

Final thoughts on managing a smooth transition in your family business

Thank you for choosing to spend part of your day today with the Law Office of Bryan Fagan. Our experienced attorneys know that managing the affairs of a small business means a lot to you. With that said, we have a track record of being able to maximize the interests of our clients when it comes to family business ownership. We take the time to learn your goals and create personalized solutions for you.

Are you interested in learning more? If so, then please do not hesitate to contact us today. Our estate planning attorneys offer free-of-charge consultations six days per week. This allows you to gain a feel for our office. Sit down and talk to one of our attorneys about their experience and their views on your situation. From there, you can assess for yourself whether our office is a good fit for you and your circumstances.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

The attorneys with the Law Office of Bryan Fagan offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law. Before signing a document or negotiating on a subject you do not know well, contact our office. We look forward to the opportunity of serving you during an important part of your life. The Law Office of Bryan Fagan is on your side.