How a Succession Plan for a Family Business Fits Into Your Estate Plan

When a family business is transferred to the next generation, careful planning and proper timing are essential. The succession plan should take into account interest rates, taxes and the effect that the transfer may have on one’s estate plan.

One factor that family business owners should take into consideration is interest rates. The importance of this factor depends on individual economic circumstances, but generally speaking it is beneficial for the transfer of a family business to take place when interest rates are low. The seller may wish to finance the sale of equity or make a distribution that is financed through borrowing, or the buyer may wish to borrow funds so that the seller can be paid in full. In any of these scenarios, lower interest rates will benefit both parties, so the owners of a family business may want to have a succession plan in place but wait to implement it until the interest rate environment is most beneficial.

A succession plan for a family business also needs to take income tax issues into account. The 3.8 percent net investment income tax (NIIT) will apply to many business sales. In addition, many transfers of a family business involve an installment sale. If the older generation’s estate plan calls for that debt to be forgiven, then there will be debt cancellation income to the estate, which can create an income tax burden for the estate. Starting the transfer of the business sooner reduces this risk.

A family business succession plan involves many individual factors, including the crucial matter of when the next generation is ready to lead. It is important to take a long view and have a plan in place that can be implemented at the right time, but business owners should also stay abreast of fluctuation in interest rates and any changes in tax laws that may be on the horizon.

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