Business owners are busy running and growing their companies. They’re often too busy to think about their eventual transition out of the business. “Retirement” is not a frequent word in their vocabulary, which often results in a lack of retirement planning, both for the transition of the company and with the family finances.
At some point in time, a business owner will have to transition out. For the purpose of this article, consider retirement to be that transition.
During the development and growing stages of the company, business owners will obtain specialists to help them overcome different speed bumps or pothole challenges they face. When it comes time to transition out of the business, I recommend using specialists to help plan for how the transition will affect both the business and the family finances.
Think about it: When you sell your business, do you want to put that income to work benefitting your family in the style you choose, or would you rather dump it into an account where it falls victim to capital gains taxes? Also consider how prepared your family would be in handling very liquid assets. Do members have experience managing wealth both individually and as a team?
With a succession plan in place that focuses both on the business and family finances, business owners are able to approach the transition with confidence, helping to reduce the anxiety of the owner, employees and family.
Business owners have four personal family questions they should consider to help get organized for a future transition:
Is a family member willing—and able—to take on the successor role and continue running the company? If this is the case, your income stream could be quite different than if you sold the company outright. You’ll want to create a transitional agreement that will include a retirement income for you and your spouse. If your successor is not able or willing now, will there be a point in the future the family member may be ready? Often transitioning control of the business to a family member puts the owner in a conflicting objective situation—doing what is best for the company versus what is best for their personal income and liquidity needs. With proper planning and time to address these issues, a strategy to maximize both interests can be reached.
Is philanthropy an interest for you and your spouse now or in the future? Timing a philanthropic opportunity to counteract the capital gains taxes garnered at the sale makes sense financially. Techniques and options to maximize charitable giving and minimize income taxes can be executed prior to a transition from the business. You can work with your financial advisor to determine what specific charitable strategies—such as donor advised funds, foundations or charitable trusts—would work best for your financial situation. Additionally, creating a charitable vehicle can provide for family continuity after the transition of the business, giving the family a common purpose and topic to participate in.
Should trust funds be established for children/grandchildren? If you plan for children and grandchildren to inherit or benefit from the sale of your business, it may be more beneficial for both you and them to have a trust established and funded with business interests before the transition of the company. Simple planning techniques created before an event can significantly increase the transaction value to the family as a whole. A trust may be more tax efficient and provide an opportunity to pass wealth to loved ones while also placing restrictions on how and when money will be distributed to your heirs.
How will each family member handle the wealth? This may be the hardest question to answer. If your family didn’t always have excessive money in the bank account, will everyone be able to responsibly manage that money? This is something you may want to discuss carefully with your spouse to create the best plan for that income when it comes to fruition. It is important to visualize both your life and your family member’s lives after the transaction, most importantly spending time with your family before the event to educate and share purpose and expectations.
Often we find business owners will begin the education process well in advance of a transition, allowing the family members to rely on a trusted advisor to manage a small amount of liquidity. It acts as a starting point and gives the business owner insight into how the family member may invest or spend a larger amount of assets in the future. This insight can be helpful in designing how wealth should be held by the family member, either outright or in trust for protection purposes.
As these questions are discussed and the answers finalized by the business owner, it’s much easier to get a business succession plan—with the family financial plan—in place. You may not be thinking about retirement or any other type of business transition now, but with a plan in your back pocket, you, your company and your family will be better prepared when the eventual transition is needed.
Michael Poulter is the Salt Lake City market leader for U.S. Bank Private Wealth Management
U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.