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A September 2015 article from the online publication “Inc.,” wrote that 66 percent of all businesses located in the United States were owned by members of the Baby Boom generation.

Members of this generation are on the cusp of retirement and take with them decades of knowledge that may be difficult to replace. Baby Boomer owners also are set to bequeath or sell over $10 trillion worth of assets over the next 20 years. That is a significant amount of wealth.

However, a 2014 CNBC article quipped that business owners would rather have a root canal than develop a business succession strategy. Owners typically do not think that far ahead or simply believe that they will never retire. Most fail to realize the implications of failing to properly plan for the transition of their business.

A quality business succession strategy can help an owner create a proper estate plan that allows a small business to be transferred to the next generation while also considering factors, such as long-term care costs and tax implications.

The following are basic questions related to business succession planning designed to address questions or concerns business owners may have on how this type of planning fits with their estate plan.

What is succession planning?

Succession planning is the creation of a plan or process to transition ownership of a business or business interest to the next generation. It typically identifies who the successor is, how the ownership interest will be valued at the time of the transition, and could include specific details on how to fund the transition.

Why is it needed?

Like a quality estate plan, a quality succession plan is necessary to plan for one’s personal and financial future. Without a clearly defined plan, the future is left to chance.

For instance, if you own a business with a partner who unexpectedly divorces or passes away, you could now be in an unpleasant business arrangement with your partner’s spouse or loved one, which could negatively affect the quality of the business. If no appropriate valuation mechanism has been created, you may need a judge to figure out what your business is worth in order for your partner’s interest to be properly valued. Many of these issues could be avoided through the implementation of a quality succession plan.

Even if you do not have a business partner, the absence of a proper plan could lead to fighting or squabbling among family members over decision making or the value of your business, which could also negatively affect the quality of your business.

Creating a quality succession plan will allow you to set your goals and priorities for transitioning your business on your own terms. It will also allow you to provide a roadmap for your family or leadership team for where you want to take your business and what level of risk you want to tolerate in the process, which will result in a faster, more effective transition period.

When should I begin?

Now. Creating and implementing a quality business succession plan can take months (or even years) to properly implement. Having a quality succession plan in place from the start of your business can give you peace of mind knowing that if something unexpectedly happens to you or your business partners, your family or loved ones will not face the burdensome task of figuring out how to properly dispose of your business interest.

Keep in mind that starting the succession process does not mean that you have given up or are ready to retire. Even before your retirement or death, having the right plan in place can save you and your family a lot of time and money.

Who should be involved?

This answer can differ depending on your circumstances. Generally, if the business is a family-owned business that includes family members’ active contributions, then such family members should be involved in the planning process as much as possible to ensure a smooth and orderly transition.

Having everyone on the same page and working out the issues in advance can save a lot of time, energy and money later. It also is productive to involve key employees in order to maintain morale and promote a smoother transition.

A quality succession plan also requires specialized expertise. The advice and counsel of a financial adviser, attorney and certified public accountant should all be considered. Our office works closely with other professionals to ensure that all areas of your succession plan have been addressed.

How does estate plan factor in?

A quality succession plan involves creating documents specific to your business that govern how things will work when you transition out of your business. It also involves having the proper personal estate planning documents in place, including a financial power of attorney and last will and testament.

A properly drafted financial power of attorney should include a carefully selected agent to act on your behalf with regard to financial and legal affairs when you are unable to do so. This document should specifically express the powers and duties that your agent has with regard to your business.

If you do not have a financial power of attorney or are unsure if your current financial power of attorney contains proper language with regard to your business interests, you should contact an experienced elder law attorney.

Additionally, your last will and testament governs what happens to your probate assets when you pass away. Your ownership interest in your business is likely a probate asset. If your desire is for your ownership interest to pass to one of your children, but your will divides everything equally between two of your children, your intention regarding who carries on your business interest may be frustrated.

All business owners should have a proper will that specifies how their assets (including ownership interests) are distributed in the event of their death.

How do I provide equally for my children?

Often the goal is to treat each child equally with regard to an individual’s estate plan. This goal can be difficult to achieve when one of the largest assets is a business.

It is common for a small business owner to have children actively involved in the business and children who are inactive. Leaving part of the business interest to a child who did not participate actively during an owner’s lifetime can create resentment in the other siblings and could be detrimental to the ongoing success of the business.

Options exist that would allow you to transfer your business to the actively participating children while still allowing you to provide an equal disposition of total assets to all your children at your death.

How often should a plan be updated?

A quality succession plan is not simply created and left to collect dust until it is needed. Your business is constantly changing, as are the rules and regulations that govern your business. Your succession plan also should be intertwined with your estate plan.

Like your estate plan, you should review your succession plan on an annual basis and at the very least after each major life event, such as a divorce or marriage, birth or death, or disease/diagnosis. Regular review will allow you to quickly make any necessary changes to ensure that the goals of both your estate plan and your succession plan can be implemented with minimal difficulty.

This article only touches the tip of the iceberg with regard to creating a quality business succession plan. I will be covering many of these questions in further detail and other topics related to business succession planning in a seminar titled, “Business Ownership & Estate Planning,” on Tuesday, June 27 at 7 p.m. Please call 717-697-3223 to reserve a seat for Tuesday’s seminar.

Learn more about the article’s author, and other community education opportunities, at www.keystoneelderlaw.com. Check out the book, “Long Term Care Guide: Essential Tools for Solving the Elder Care Puzzle,” at the Whistlestop Bookshop or Amazon, and see Keystone’s free directory of services for older adults at www.mypeaceguide.com. Keystone Elder Law has offices in Mechanicsburg and Carlisle. Call 717-697-3223 for a free telephone consultation.

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