Whatever type of business you own, you need to arrange for the transfer of the business or partnership at your retirement, incapacitation, or death. If the family members will continue the business after your death, make sure you have enough cash available to cover estate taxes or other expenses or they may have to sell assets of the company to pay the bills (life insurance is an excellent source of funds for these expenses). A buy-sell agreement can be used to help avoid unexpected surprises and make the transactions smoother, but there are several issues to address before the agreement can be done. Professional advice is absolutely necessary for any of these actions.

VALUING THE BUSINESS

        One of the first steps in business succession planning is to determine the value of your business. Your business may be the most significant asset in our estate and without proper planning, you may be subject to significant estate taxes at your death. Because of the lack of an open market for family-owned businesses, arriving at an appropriate value for stock in a closely-held business can be a complex undertaking. Usually, the opinion of one or more independent appraisers is needed.

        What do appraisers look at when they are valuing a business. The following are all factors that are considered, but business valuation is an inexact science and courts have been known to strike down valuations that they've deemed to be too low or too high.
 

• The nature of the business and its history: Is there competition or does the company have a niche? Is it cyclical?
• The financial condition of the company: Are there financial problems or is the company sound?
• The economic outlook of the industry
• The book value, earnings capacity, and the dividend-paying capacity of the company.
• Stock prices of publicly traded companies in a similar industry.

 

• Minority shares: If the transfer is not giving away control, the value of the transfer is reduced. Individual with minority interests generally can't influence the management of the company or make any significant decisions.
• Lack of marketability: The valuation is based on the assumption that there is a willing buyer for the shares being transferred. In fact, there are probably few buyers in the open market who would be interested in a piece of a family-owned business.
• Key Person: What if the person leaving the company is the one who brings in most of the business? Or creates all the ideas? Or is the only one customers will deal with? A key person discount can be quite significant if it can be proven. It can also apply to a key employee as well as an owner.

 
  BUY-SELL AGREEMENTS  

• Provides for an orderly transfer of the business
• Permits present co-owners and family members to continue in their business roles
• Allows for a fair market value price for the business (or at least provides a formula for determining the value).
• Provides funds for the purchase
• Lets the owner plan for estate taxes ahead of time

  OWNERSHIP FORMS  
• FAMILY LIMITED PARTNERSHIP

        In general, a family partnership strategy is most attractive to owners of unincorporated businesses. For instance, a family partnership may be formed with your children or other family members and the owner would continue to operate the business as the general partner. The important consideration is to avoid incurring gift taxes. The limited partnership interests could be given to the children (or other family members) on a tax free basis using the $10,000 annual gift exclusion. Or, the shares could be sold at a fair market value price and again, gift taxes would be avoided.

        As limited partners, your children would have no control over the business' management and there would be limited legal liability for partnership debts and actions.

        For income-tax purposes, all partnership income, expenses, gains, losses, deductions, and credits, would pass through to the general partner and the limited partners.

        For estate-tax purposes, the value of the interests transferred to family members and any appreciation on those interests, would be removed from the owner's taxable estate.
 
 

• TRUSTS TO HOLD S CORPORATION STOCK

        If your business is an S corporation, your stock may comprise a substantial portion of your estate. If the surviving family members do not have the desire or the expertise to manage the business after the owner's death, a trust incorporated into your Will may be the best solution. The Will creates a trust that would hold the shares of the S corp.'s stock and the management would be appointed through the terms of the will and trust. Also, a living trust could be created to hold the shares while the owner is alive, but it must be carefully structured to continue after their death.

        In either case, only certain types of trusts are eligible to hold S corporation stock so the trust must be designed carefully. If you transfer your S corp. stock to a nonqualifying trust, the corporation's S status may be terminated. The result would be severe federal income-tax consequences so professional advice is vital.