Cleveland, Ohio Attorney

What is Business Succession?

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Whether you’re planning for retirement or the life of your business after your death, it’s imperative to develop a business succession plan to sooner rather than later.   There is no “one plan fits all” when it comes to developing a succession plan for your business.  And given that the economy is constantly changing, it isn’t surprising small business owners focus their energies on business survival, future growth, and even remaining active in business after retirement.

Business succession is about three things (1) Estate planning; (2) Retirement; and (3) Risk Management.

Estate Planning

Your estate plan should be incorporated into your business succession plan.  What will happen to your company assets after you die?  Who will run your business?  If you want to provide for your family using your business assets, you should consider at the very least having a last will and testament.  Carefully drafting your will allows you to select desired beneficiaries, elect an executor, and transfer your assets through probate.  Your family will be going through a difficult time.  Setting up a last will and testament in advance helps your family during that difficult time.

Retirement

When thinking about retirement, it’s important to consider your options when selling your business.  Will you sell with a lump sum, installments, mix, employee buy-out, or merger?  There are numerous options when planning for your retirement and taking advantage of the business you built.  Thus, business succession is about planning for your exit strategy.  To learn more about your options, visit this article.

Risk Management

Business succession is about limiting your risk.  If you have partners within your company, you should be aware of the risks involved.  For example, if your partner gets divorced, their spouse is entitled to the partner’s share in the business through the divorce proceedings.  If your partner dies, you can now be partners with their spouse or estate.  One option to avoid this potential risk is to create a buy-sell agreement through a cross purchase agreement or entity purchase agreement.

Business succession is an important idea that every business owner should consider.  Contact your Cleveland, Ohio business succession and estate planning attorney for more information on how to set up your plan.  You may also consider contacting Cleveland, Ohio law firm Baron Law LLC at 216-573-3723.

 

Business succession attorney cleveland

Business Succession Options

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Cleveland, Ohio business succession attorney Dan Baron offers the following on estate planning and business succession:

You’ve spent a lifetime building your business and now its time for retirement.  Where do you start?  When developing your business succession plan, it’s important to consider all of your options.   Selling and/or transferring your business will have significant implications on your estate plan, taxes, family, and financial well-being.  Here are a few suggested options with a discussion on these implications.

Valuation

Regardless of whether you sell to your family, third-party, or friend, you will need a complete evaluation of your business.  Many business owners overvalue their business because they’re place an emotional value on the blood, sweat, and tears they’ve spent growing their business over the years.  It’s imperative to get a third-party evaluation on your business to better understand what your company is worth, and who is willing to buy.

When evaluating, your business attorney and/or financial advisor will consider several approaches to your company’s worth:

  • Market Approach – Revenue growth, profitability, company size, liquidity
  • Income Approach –Revenue growth, profitability, cost of capital, leverage; Working capital efficiency; Low capital expenditures
  • Asset Approach –Asset intensive, leverage, scarcity, time

Now that you have a value, how should you sell your business in an effective way to provide a secure retirement while considering tax consequences? Let’s consider the following options.

Lump Sum

Selling your business for millions of dollars is every business owners dream.  However, this may not be a viable option for several reasons.  First, if selling to employees or family, these buyers may not have enough capital or credit to purchase your business’ worth.  Next, selling your business outright will result in a large capital gain and tax consequence compared to taking payments over timer.  It could also place you in a different tax bracket entirely.   Thus, when considering selling for a lump sum, you should consult with your estate planning and business attorney to consider all the tax consequences and other planning tools available

Lump Sum + Installments

If a lump sum will create an unfavorable tax consequence, then you can structure the deal so that you take a smaller lump sum up-front and payments over time.  Your business attorney will suggest taking a lump sum that is just under the threshold of a tax bracket.

Installments Only

If selling to family or employees, installment payments are an affordable way to sell your business. However, many times the business owner will still be involved when selling to employees and moreover, the business needs to be sustainable in order to receive the payments over time.  In other words, you can’t get paid if they business fails over time.

Self – Cancelling Installment Note

Here the business owner gives his employees the business in exchange for a promissory note – usually purchased by employees.  The promissory note is usually coupled with a personal guarantee from the employees.  Payments are then made over time but cease when the business owner passes away.  This option reduces capital gains and estate taxes.  However, the payments made will be set at a premium set by the IRS mortality tables to account for the business owners lifetime.  If the business owner lives past this time, the payments cease.  If the owner dies before this timeline, the payments cease.

There are several other options business owners have when selling their business.  For more information, or to request a free consultation with a Cleveland, Ohio business and estate planning attorney, contact Baron Law LLC today at 216-573-3723.

Living Trusts & Estate Planning

Ohio Revocable Living Trusts

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What is a revocable trust?

Revocable trusts, commonly referred to as revocable living trusts, can be changed or terminated during a person’s lifetime as long as they are competent. The creator of the trust, referred to as a “grantor” is usually the initial trustee and maintains full control over the assets placed in the trust. A successor trustee is named to manage the trust assets if the grantor becomes incapacitated or passes away.

This type of trust is attractive because you can update your beneficiaries, change which assets are included in the trust, and update how assets will be distributed.

Revocable trusts avoid probate and allow you to maintain privacy. In addition to saving time and money associated with the probate process, you can protect your family’s documents from becoming part of public record.

Revocable Trusts vs. Irrevocable Trusts

Upon death, a revocable trust becomes an irrevocable trust and cannot be changed. At this point, the successor trustee must follow the instructions in the trust document to distribute the trust’s assets.

Learn more about the key similarities and differences of revocable and irrevocable trusts here.

Revocable Trusts vs. Testamentary Trusts

Revocable trusts are funded during the grantor’s lifetime, while testamentary trusts are funded after the death of a testator, or creator of a will.

Testamentary trusts are also called will trusts because they are created inside a will and do not take effect until you pass. Unlike a revocable trust, this type of trust will go through probate costing you time, money and your privacy.

Why should I set up a revocable trust?

A revocable trust can:

  • Avoid probate court and provide an efficient, seamless transfer of assets to beneficiaries
  • Protect your children’s inheritance if your spouse remarries after divorce or death
  • Protect the money and assets left to your beneficiaries from claims of their creditors or litigation
  • Protect the inheritance and government benefits of children with special needs
  • Make it easier to distribute specialty assets, such as real estate or artwork, to beneficiaries

More Specific Types of Revocable Trusts & How They Work

Joint Trusts

Joint trusts are often utilized by married couples to cover joint or individual assets and to specify what happens upon the death of each spouse. Typically, when the first spouse passes, the living spouse becomes the trustee and gains control over the trust. Then, when the surviving spouse passes, a successor trustee takes over management and distributions.

Bloodline Trusts

Bloodline trusts are created to ensure that spouses of intended heirs do not inherit in the event of divorce or death. Instead, if a child passes or divorces, their children (i.e. your grandchildren) would become the beneficiary.

Special Needs Trusts

Parents or grandparents of a disabled child can establish a special needs trust as part of their estate plan. This type of trust helps protect private funds for the disabled loved one without putting their eligibility for government-offered benefits at risk. There are three main types of special needs trusts:

  • Third-Party: A third-party sets up and funds the trust
  • Pooled: Managed by a non-profit organization
  • Self-Settled: The disabled beneficiary sets up and funds the trust

How To Set Up A Revocable Trust With An Attorney

It’s important to remember that a revocable trust is just one part of a comprehensive estate plan. For example, in many cases, a revocable living trust is created alongside a pour over will. The pour over will is designed to work together with your living trust, and acts as a backup plan to ensure all of your assets are directed into your trust.

After it has been determined that a revocable living trust should be part of your estate plan, an attorney can walk you through these key steps:

  1. Decide what assets will be placed in your trust. While you might already have an idea of what you’d like to include, your attorney may help you uncover some additional assets that would benefit from being placed in a trust. Assets can range from cash and investments to real estate and other property.
  2. Choose your beneficiaries. They might include your spouse, your children, grandchildren or other close family members.
  3. Establish the rules of your trust. For example, will assets be distributed with age requirements or terms for how the assets may be used?
  4. Determine who will manage the trust if you are not competent or once you have passed.

Once you are confident in these decisions, your estate planning attorney can draft the trust document and begin assisting you with funding the trust.

This blog is for educational purposes only; it is not intended to provide legal advice. If you’re planning for your estate and want to speak with an attorney, call 216-573-3723.