Many entrepreneurs start a family business in hopes of leaving a legacy for their kids. But what happens to the company when you pass away or become too old to run it? If you want your business to outlive you, then you need to have a succession plan in place. Here’s why estate planning is crucial for a family business to survive the test of time.
Why Estate Planning Is Crucial for a Family Business
Keeps the Business Going
If you run the show and manage your company’s operations, you need to think about what will happen when you’re gone. Failing to plan for the future could leave your business without a clear successor, which will disrupt operations.
Ask yourself who will take over for you when you’re no longer able to fulfill your business responsibilities. Have you designated a power of attorney in case you’re suddenly incapacitated? When you officially step down, do you want to hand the business over to one or more of your children, or will you choose a successor outside the family?
It’s also worth considering when you want to pass the torch. Do you want to take an early retirement or work as long as you’re able? Figuring out your exit plan will help you determine when you need to start looking for your replacement. The person you choose should share your values and vision for the company to ensure a smooth transition.
Ideally, your successor will shadow you to learn about the day-to-day operations of the business. But if that’s not possible, building a knowledge base can give them the information they need to run the company successfully. You may also consider establishing a board of directors to advise the new CEO on business decisions and strategy.
Reduces Tax Burden
Another reason why estate planning is crucial for a family business is taxes. Using trusts and other tax reduction strategies can help you pass on more of your wealth to your children. One option is an Intentionally Defective Grantor Trust, which prevents your beneficiaries from having to pay gift tax. Speaking to a financial advisor can help you determine the best way to divvy up your wealth and reduce your tax burden.
Allows You to Inform Family
A critical part of estate planning is to inform your family about your decisions. To ensure a successful business transition after you’re gone, the whole family needs to be on the same page. Everyone should know what their future role will be so they can prepare.
Telling everyone how you want to distribute your assets now can also prevent misunderstandings and hurt feelings. Your kids are less likely to feel disappointed if they know how you’re dividing your assets and the reasoning behind your decisions. If they have questions or concerns about your estate plan, they’ll be able to address them with you directly. Although you have the final say, it may be helpful to hear your family’s perspective on your succession plan so you can take their thoughts into account.
It can be difficult to think about what will happen to your family and business after you’re gone. But by working with a lawyer to carefully plan your estate, you’ll be able to ensure your legacy continues.
Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.