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| Advisors' Forum |
Thinking Ahead
05/01/2007
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Two years ago I inherited a large sum of money, and recently
started my own business. I am married, in my late 30s and have two young
children. My business just received its second round of financing, and a friend
suggested that I begin a preliquidation plan already. I am not planning to sell
anytime soon, so is it too early to start thinking about liquidating?
It is never too early to start
thinking about planning for succession of the business, whether as a result of a
liquidation event or through a transfer to the next generation. Advisors often
counsel their clients to consider the succession planning issue when the
business is formed, but owners rarely take advantage of the opportunity at that
time.
The earlier an owner considers succession planning, the more
likely the business will succeed after the current owner is no longer running
it. Planning for the transition has numerous benefits. It allows current owners
to get involved in the process and to realize the economic value of their
efforts. It also can reduce or eliminate unwanted tax consequences, provide
warnings (and possible solutions) to the issues that will arise in the
transition, and help ease the emotional and psychological barriers to
transition.
By planning for a liquidation event or other transition of the
business at this early stage, you will have more alternatives to consider to
maximize the value of the business for your family. Once the business has grown
significantly in value, many of the tax savings opportunities will be lost.
Because taxes (both income and estate) take a large portion of the proceeds from
the sale of a business when it is passed on to future generations, the earlier
you start to plan, the more likely you can minimize those taxes.
Raymond S. Kreienkamp, Blackwell Sanders Peper Martin, St.
Louis
Essentially, your friend is suggesting that you consider exit strategies, which ultimately affect your return
and your investors’ return. While you are not planning on selling, clarity about
long-term goals will help you make current decisions that will guide your
business toward these goals.
You should also consider your personal estate planning. Because
you just inherited money, your wealth may significantly exceed your spouse’s
assets, and that could influence your planning. If you have significant assets
outside of the business, you may want to look at how safe those assets are from
risks posed by the business. Alternatively, if you have all of your assets tied
up in the business, you might want to consider whether you have enough term life
insurance to provide for your family in the event something happens to you. A
well-drafted estate plan will help make sure that your goals are
accomplished.
Finally, if your business has the possibility of significantly
appreciating over the next few years, you should consider whether making a
transfer to an irrevocable trust or a partnership with a transfer of partnership
interests to your children (or other heirs) makes sense. There are many
potential strategies for this type of transfer that a good estate planning and
tax attorney or accountant can suggest.
Steven M. Goldberg, Friedemann Goldberg, Santa Rosa, Calif.
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