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Succession Planning: Now or Never

publication date: May 4, 2012
author/source: Kurt Glassman
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Based upon President Obama's proposed budget, Succession Planning in 2012 is critical to the survival of all family businesses.

Last week President Obama introduced proposed tax changes that will significantly impact a family business's ability to perpetuate and retain employees. Specifically, the proposed 2013 tax changes call for:

  • Higher Estate Taxes

  • Reduction in Life-time Gift Exclusion

  • Higher Tax Rates for Shareholders of S Corps and LLC members

  • Tax Advantages for Wall Street

If a family business is committed to perpetuation, now is the time to transfer ownership to the next generation, but be careful. Transferring ownership to the next generation without considering governance and management succession issues is like giving your children a Ferrari when they have been driving a VW, a catastrophe waiting to happen.

       Succession Planning: Now or Never

Succession Planning: Key Elements
If we are to successfully perpetuate our family businesses to the next generation, a Succession Plan needs to be designed and implemented that addresses these key elements:

  • Ownership Transfer

  • Governance

  • Management Succession

Ownership Transfer
Under current tax law, a married couple can give $10 million to their children without incurring gift taxes.

After considering valuation discounts and other planning techniques, a significant number of family businesses will be able to be perpetuated and ownership can be efficiently transferred to the next generation of owners. However, after December 31, 2012, the estate tax will return to the higher rates and lower exclusion that was in effect in 2009. This is significant for a family business!

Current shareholders still face the challenge of being fair and equitable to all their children while making sure the assets end up in the right children's hands. Ownership of your family business will eventually transfer, voluntarily or involuntarily. There are much better choices you can make now rather than letting government agencies sort it out for you later. Further, how much do you want to give the IRS? You have options, today, that you may not have going forward.

Clearly understanding "how" we make decisions is critical to resolving conflict. We should not transfer ownership to the next generation without updating our governance structure and our governance documents. All family members need to know what hat they are wearing and their leadership role. Governance structures need to be created to maintain harmony and develop the next generation of responsible shareholders. Family Councils, Board of Directors and Advisory Boards need charters and governance documents that express the family and businesses' values and vision, and performance agreements should be developed so everyone knows their role and responsibility.

Articles and bylaws, buy-sell agreements, wills and trusts and funding strategies need to be updated. Life and disability insurance needs must be reevaluated and an audit of existing life insurance policies should be performed.

Management Succession
The Succession Plan must address the needs of the business and the management team. The strategic plan should identify the Company's Vision.

A leadership team needs to be developed that will work together and protect the next generation of shareholders. Individuals need to know what is expected of them and their role in the organization.

In addition, key members of the management team need to be retained, rewarded and treated as if they are members of the family and a culture needs to be developed that promotes trust and accountability.

Now is the time to implement your ownership transfer plan. However, do not forget to address how decisions are going to be made and who is going to make them. You currently have a window of opportunity — don't miss it.

Take action today. For further information and assistance, please complete the Contact The Author form below.

Kurt Glassman collaborated with Hal Johnson in writing this article. Hal Johnson, also an Insurance Thought Leadership author, has been CEO of eight different companies in the US and the UK. His primary focus has been building management teams to produce outstanding performance. In addition to serving on several boards of directors, Hal is Chairman and CEO of LeadershipOne. He consults widely and speaks regularly on how to mentor a company to greatness.

Kurt Glassman

Over his 30+ year career, Kurt has started, acquired, and provided counsel to a variety of businesses and owners. He has built and led international and professional service organizations; created, through acquisition, a $50 million building materials operating entity; and developed multimillion-dollar real estate projects

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