Family Succession Planning for Wealth Transfer

A sound Family Business Succession Plan, contains an allegory within the plan for the efficient transfer of wealth to address the financial needs of the subsequent owners and operators of the family business, combined with a strategy to assure that there is liquidity for the payment of outstanding tax issues; such as, the estate and inheritance taxes that may arise from the death of an earlier principal of the business entity. While the transfer of wealth is important, this should be seen as only part of the overall Succession Plan, which should include the changes structure of future management, which looks to preserve the integrity of the business. However, if properly presented to the family business participants, the succession plan’s wealth transfer component can provide further initiative and a spirit of cooperation between members who might otherwise not be “sailing in the same direction”.

In order to simplify the issues and to therefore make it understandable, remember that the Succession Plan is to address two parts of the Family Business – the business and the family. The nature of the underlying concerns seem to take on two forms for each of these parts; each part has a concern for liquidity and stability. Remember, that in most early generational businesses, it may be grandma and grandpa that initiated the business, which is now being looked to I order to support three children, their spouses, and eight grandchildren. Rarely, if ever, can that happen without the concerns of liquidity and stability being at risk.

In part, insurance products as part of an estate and financial planning mix for the business, which are established during the life of the earlier generations and for the benefit of the later ones, can assist in this wealth transfer. These insurance products, if property added to the property controlled by a Trust, can allow for the liquidity necessary to address later issue of stability and liquidity, since the transfer can be structured to avoid or defer taxes.

However, is that enough? Remember, there is a concern for the multiplication of persons who will be looking to participate in this family business in the future. So if right now it can be done, the company principals should consider borrowing, based on the company’s cash flow or other sources of cash flow, to pay for the premiums on the insurance products; utilizing the insurance for the collateral for loan repayment and the security that the lender may require. If structured properly, the death benefit can pay off the loan and allow the balance of the proceeds to remain in the trust, which should include additional principal and accumulations from the insurance, because of the leveraging of the premiums. In doing so, the Succession Plan does for the liquidity and stability, what the business planning of management and agreements does with respect to the continuity of the business organization.

Needless to say, you need a cooperative effort between the lender and the lawyers that you deal with and a synchronized plan that brings the participants in the Succession Plan closer together. In seeing this effort to leverage for the future, the succeeding persons tend to work closer together because of the proposed effort to secure stability and liquidity for their future.