Legacy Protection

Business Succession Planning: Protect Your Legacy

Ensure Your Business Thrives Beyond You

Without proper succession planning, your business could fail when you exit. Learn family succession strategies, buy-sell agreements, and tax-efficient ownership transfers.

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70%

Family Businesses Fail in 2nd Generation

20-40%

Typical FLP Valuation Discounts

$13.61M

Lifetime Gift/Estate Exemption (2024)

5-10 Years

Ideal Succession Planning Timeline

Quick Answer

70% of family businesses fail to transition to the second generation - proper planning dramatically improves odds
Start succession planning 5-10 years before transition to develop successors and implement tax-efficient transfers
Family Limited Partnerships can provide 20-40% valuation discounts for gift and estate tax purposes
Buy-sell agreements funded with life insurance ensure smooth ownership transitions at death or disability
Gradual ownership transfer during life removes future appreciation from your estate and uses annual gift exclusions

The Opportunity

Why This Matters for Business Owners

Business Continuity

Without a succession plan, your death or disability could devastate your business, employees, and family. A proper plan ensures the business continues operating, employees keep their jobs, customers are served, and your family receives the value you built - not a fire sale at 20 cents on the dollar.

Family Succession Complexity

Passing a business to family involves emotional and financial complexity. Which children are involved? How do you treat children equally when one works in the business? How do you transfer ownership tax-efficiently? Family succession requires careful planning to avoid destroying both the business and family relationships.

Management Succession

Even if you sell externally, you need capable management during transition. Identifying and developing successors takes years. Key person insurance protects against losing critical people. Buy-sell agreements define what happens if a partner dies or leaves. These structures must be in place before they are needed.

Tax-Efficient Wealth Transfer

Transferring business ownership during life can use valuation discounts (20-40%), annual gift exclusions ($18K/person), and lifetime exemption ($13.61M in 2024). Gradual transfers while you maintain control can move significant value to heirs at reduced transfer tax cost.

Implementation

Proven Strategies

Family Limited Partnership (FLP) Transfer

Transfer business interests to a family limited partnership, then gradually gift limited partnership interests to heirs. You maintain control as general partner while transferring economic value. Limited partnership interests qualify for valuation discounts (lack of control, lack of marketability) reducing gift/estate tax impact.

Best for: Business owners with significant value who want to transfer wealth to family while maintaining control during transition period.

Example:

Business worth $5M. Transfer to FLP, apply 30% combined discount. LP interests valued at $3.5M for gift tax. Gift to children over time using annual exclusions and lifetime exemption. Estate tax savings: $600K-$800K.

Intentionally Defective Grantor Trust (IDGT) Sale

Sell business interests to an IDGT in exchange for a promissory note. You remove future appreciation from your estate while receiving income from the note. The trust is "defective" for income tax (you pay tax on trust income) but effective for estate tax (assets are outside your estate). Powerful for appreciating businesses.

Best for: Business owners with rapidly appreciating businesses who want to transfer future growth to heirs estate-tax-free.

Example:

Business worth $3M today, expected to grow to $10M over 10 years. Sell to IDGT for $3M note at AFR interest. At death: $10M business outside estate. Only $3M note (if still outstanding) in estate. Estate tax savings on $7M appreciation: $2.8M+.

Buy-Sell Agreement with Life Insurance Funding

Establish legally binding buy-sell agreement specifying what happens to business interests at death, disability, or departure. Fund with life insurance to provide liquidity. Options include cross-purchase (partners buy from each other) or entity redemption (company buys shares back). Ensures fair value and smooth transition.

Best for: Business partners who need clear agreements on what happens when a partner exits, dies, or becomes disabled.

Example:

Two equal partners, business worth $4M. Each partner insured for $2M by the other. Partner A dies: Partner B receives $2M insurance, uses it to buy A shares from estate. Estate receives fair value, B owns 100%.

Avoid These Pitfalls

Common Mistakes

No Written Plan

Many owners have succession plans in their head but nothing documented. Verbal understandings create disputes when circumstances change. Buy-sell agreements, wills, trusts, and operating agreements must be written, signed, and regularly updated.

Assuming Children Want the Business

Many owners assume children will take over without honest conversations. Children may have different career goals, lack capability, or not want the stress of ownership. Have candid discussions early and develop backup plans.

Inadequate Funding

Great succession plans fail without funding. Buy-sell agreements without insurance leave survivors scrambling for cash. Gradual ownership transfers without income planning leave retiring owners broke. Match your succession strategy with appropriate funding vehicles.

Questions

Common Questions

Here are the most common questions we receive about this topic.

Ask Your Question

Ideally 5-10 years before your intended transition. This allows time to: identify and develop successors, implement tax-efficient ownership transfers, build management depth, and create proper legal documentation. At minimum, every business owner should have basic buy-sell and disability provisions in place immediately.

Common approaches: give business to active child and other assets to non-active children, use life insurance to equalize, have active child buy out siblings over time, or create different classes of ownership (voting vs non-voting). The key is clear communication about your reasoning and ensuring all children feel treated fairly.

A legally binding contract specifying what happens to business ownership when certain events occur (death, disability, retirement, divorce, termination). It defines who can buy the interest, at what price, and how payment will be made. Every business with multiple owners needs one.

Lifetime transfers offer advantages: you can see successors develop, use valuation discounts, spread transfers over years using annual exclusions, and remove future appreciation from your estate. Transfers at death are simpler but may face higher estate taxes. Most optimal plans use both strategies.

Professional valuations from certified business appraisers provide defensible values for legal and tax purposes. Methods include: income approach (capitalization of earnings, discounted cash flow), market approach (comparable sales), and asset approach. Valuation discounts may apply for minority interests and lack of marketability.

Ready to Secure Your Business Legacy?

Every business succession situation is unique. Let us help you create a plan that protects your business, your family, and your legacy.

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