As a family business owner, your company is more than an asset—it’s your legacy. You’ve poured your heart into its success, and ensuring its future prosperity is paramount. Safeguard your family’s future and your business with a well thought estate plan that’s organized and communicated way before it becomes necessary. Read on for pointers, including the use of a revocable living trust to anchor the plan.
Family Biz? Plan Ahead!
It’s a fact of life: no one gets to go on living–or running a beloved and solid family business—forever. Absent careful pre-planning to enable a business to thrive into the next generation, legal battles and even dissolution are possibilities. Toward safeguarding your business, and preparing for a smooth transition to the next generation, Phelps LaClair Law suggests that the first steps are clarifying the succession plan, and attending to family dynamics:
Your succession plan should clearly outline who will take over the business and under what conditions. Here are a few questions to consider when formulating your plan:
- Are your heirs interested in running the business after you’re gone?
- Do you want your business to be sold, or will ownership and management stay within the family?
- Who do you plan to name as your successor, and when will the transition happen? Tip: If multiple children are involved, consider separating management roles from ownership shares to avoid conflicts.
…An estate plan that fails to account for personal relationships can lead to misunderstandings and resentment, and sometimes even litigation. When you have a family business, it’s important to schedule family meetings to communicate your vision, especially if some family members are more involved in the business than others. Make sure your estate plan is transparent, and clearly state who will receive what to prevent conflict.
The right business structure is also key to the future success of the family business. For example, if the business is currently a sole proprietorship or general partnership, restructuring into an LLC or corporation may be best: “These entities offer better liability protection and easier transfer of ownership….Similarly, restructuring as a corporation can allow you to issue shares to family members, which not only helps with succession planning, but may also offer tax advantages depending on your income structure.” Another step toward facilitating a smooth transfer of the family business is the establishment of a living trust, as Phelps LaClair explains:
A revocable living trust is one of the most effective ways to transfer ownership of a family business without the delays of probate. A trust acts as a legal entity that can hold and manage business assets for as long as the grantor dictates in the trust document. This also allows for a more private and efficient transition, as trusts are not public record like wills. You can retitle your business interests to fund the trust and leave instructions for your successor trustee, so they can manage or distribute the business assets according to your wishes.
Helpful To Know: Revocable, Living Trust?
Trusts, in general, can be the “MVP” of estate planning, and for many of us, a revocable living trust offers an especially good and flexible way to both plan for our own needs as we age, and to designate assets for beneficiaries. As the terminology implies, a living trust is one that we establish during our lifetimes, and making a trust revocable enables us to change it as our circumstances unfold. Investopedia offers this quick summary of trust basics as a foundation for planning:
A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, a trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary….A living trust, also called an inter-vivos trust, is a written document in which an individual’s assets are provided as a trust for the individual’s use and benefit during their lifetime. A trustee is named when the trust is established; this person is in charge of handling the affairs of the trust and transferring the assets to the beneficiaries at the time of the trustor’s death.
When choosing a trustee and successor trustee, it is important to consider a reliable person who deeply understands the intentions of the trust and can be counted on to administer the trust accordingly. If the assets placed in a trust are complex, financial expertise, via the appointment of a professional trustee, may be wise. Ultimately, whether a friend, relation or professional is selected, the trustee has a fiduciary obligation to the beneficiaries, and must always exercise reasonable care and skill in managing the assets of the trust. Accordingly, the trust agreement may require a trustee bond, which is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with the law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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