Many Kent business owners may hope and expect that ownership and operation of the family business will be passed on to children after retirement or in the event of death. While in some cases business interests will pass smoothly to children under default probate laws, a number of different factors can lead to unexpected and undesirable results. Business owners who take the time to establish a solid succession plan can enjoy greater certainty about the future of their businesses and potentially take advantage of opportunities to reduce inheritance tax liabilities at the same time.
By pairing instruments such as trusts or buyout agreements with life insurance policies, business owners can set the stage to pass on their assets to their preferred heirs. Failing to set up a succession plan can lead to potentially disturbing consequences.
One financial planning professional described a situation in which a business owner expected to continue working for a few years before retiring and handing the business over to his children. Unfortunately, the man died before he could sign over his interests and the entire business passed to his second wife. The wife proceeded to fire the man's two sons and turn the business over to her two children from a previous marriage.
One way to avoid this type of situation is to execute a buyout agreement that would obligate the surviving spouse to sell the business to designated heirs. The heirs would take out a life insurance policy on the business owner and use the proceeds to buy out the surviving spouse's interests. An extra layer of asset protection and a means to avoid probate can be added by conveying business interests into a trust and using trust-funded insurance proceeds to buy out the surviving spouse.
Business succession plans need to be carefully constructed in order to perform as desired. An experienced estate planning professional can help Washingtonians make sure that family businesses stay in the family.
Source: PlasticsNews.com, "Family biz needs succession plan," Kevin LaMont, Dec. 7, 2012