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February 28, 2012 7:00 AM CST

Business succession planning part II

Critical tools

By ,

An outdated succession plan can be just as ineffective as no plan at all.

An outdated succession plan can be just as ineffective as no plan at all.
Editor’s Note: In Part I of business succession planning, the critical importance of business succession planning to the small or family-owned business was discussed. In Part II, some of the common tools used for transitioning a business to the next generation are introduced.

As an owner of a small or family-owned business, you can choose from many tools to transition your business to the next generation of leadership and maximize tax savings. It may simplify things to think of most business succession planning tools as falling into one of two categories: selling your business interest or other income-generating tools; and gifting your business interest.

Sales of Business Interest

If you are interested in selling your business to a family member, key employee or a third-party, you may want to consider a buy-sell agreement, a simple loan or, perhaps, even a Grantor Retained Annuity Trust (GRAT) or a Grantor Retained Unitrust (GRUT). The buy-sell agreement is a legal contract that dictates, in advance, the terms of sale of your business interest to a willing buyer. A buy-sell agreement allows you to remain in control of your business until a triggering event occurs, such as retirement, disability or death. Upon the triggering event, the buyer is obligated to purchase your business interest in accordance with the terms of the buy-sell agreement.

A second income-generating option is a simple loan. Consider lending funds to your successor, so he can purchase some or all of your business interest. As a lender, you receive payments plus interest from the promissory note for a definite period of time, while effectively transferring your interest in the business out of your taxable estate. This simple, less-costly alternative is especially appealing, since promissory notes offer flexibility and both parties can agree mutually upon the terms of repayment. A loan also works well within any estate plan, because a person can draft specific instructions into his Will or Trust Agreement directing that the Fiduciary extend the note for a certain additional term upon its expiration.

If the idea of receiving a regular stream of income appeals to you, consider a GRAT or a GRUT. It sounds more complex than it is. To use either, first, establish an irrevocable trust to hold appreciating assets (in this case, your business) and name a beneficiary to the trust (such as your children or other named successor). The goal of a GRAT or a GRUT is for the Grantor to pass interest in the business to the beneficiaries of the trust, and, in return, the trust pays the Grantor annuity income for a set term of years. A downside to using a GRAT or GRUT is that the funds may be included in the Grantor’s estate, if the Grantor does not outlive the GRAT/GRUT term.

Gifting Business Interest

If you are less concerned about income generation, consider gifting your business interest to your successor or creating a Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC) and gifting your shares in either entity to a family member.

For 2011 and 2012, the annual exclusion for Federal gift taxes is $13,000, and the lifetime gift tax exemption is a generous $5 million. This presents a unique opportunity for succession planning. Under current federal laws, a person can gift up to $13,000 to any number of individuals per year and not pay any gift tax on those transfers. In addition, a person also may gift up to $5 million dollars during a lifetime (in addition to any annual exclusion gifts he may have made) without being subject to gift taxes. By establishing an annual gifting plan, you can gift some or all of your business to your successor over time, without paying federal gift taxes, while reducing the size of your taxable estate.

If your plan is to keep your business in your family, consider a FLP or a FLLC. First, you must form a business entity, known as a Limited Partnership or a Limited Liability Company. Next, you transfer your business interest into the partnership or LLC. As owner, you continue to hold a general partnership interest for yourself, or if you’re using an LLC, you hold your interest as a managing member of the LLC, and maintain control over the company. Once you have established the entity, you can begin gifting your limited partnership interest or your membership interest to a family member who is already involved in the day-to-day operations of the business. Through proper and appropriate planning, you can maximize the value of your gift by taking advantage of certain valuation discounts.


There are many vehicles you can use to transfer your business interest. It is critical to bring your lawyer and accountant into this discussion early to develop the right plan for your business. Once you have developed your succession plan, remember to revisit it as time passes and circumstances may change; an outdated plan can be just as ineffective as no plan at all.

Originally published in Masonry magazine.

About the Authors

Tim Hughes is Of Counsel to the law firm of Bean, Kinney & Korman in Arlington, Va. He can be reached by email at or by phone at 703-671-8200.

Lauren K. Keenan, Esq. is an associate in the law firm of Bean, Kinney & Korman. She can be reached at or 703-525-4000.


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