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It's tempting to think of estate planning as something
that needs to be done in the future to address some far-distant
eventuality. Yet the Small Business Administration reports
that at any given time, 40 percent of U.S. businesses are
grappling with issues involving the transfer of asset ownership.(1)
And the options aren't always attractive. They include
shutting down the business, selling to an outsider or employee,
retaining ownership but hiring outside management, or retaining
family ownership and management control. Even if you prefer
the last option, however, it's unlikely that you have a
formal estate conseervation plan. One survey found that
just a formal estate conservation plan. One survey found
that just 10 to 20 percent of small-business owners have
written estate plans, even though most of their wealth is
generally tied up in their businesses.(2)
Strategy One: Buy-Sell Agreement
One of the most common strategies to help ensure an orderly
succession is the buy-sell agreement. A properly designed
buy-sell agreement sets a price for business interests,
determines a funding vehicle, and specifies how a buyout
would take place. This strategy often includes life insurance
with the death benefit being used to purchase shares of
the business.
Strategy Two: Family Limited Partnership
Another method for transferring assets is to establish
a family limited partnership (FLP). The FLP is an entity
managed by a general partner (in most cases, the business
owner) for the benefit of limited partners such as a spouse,
children, or a family trust. Because the partners don't
control the assests and partnership shares are illiquid,
the assets are typically discounted from fair market value
for gifting, income, and estate tax purposes.
These are just two of many techniques that exist to help
ensure the transfer of business assets to your heirs. Because
estate planning involves a complex web of legal documents
and strategies, consult your tax and legal advisors before
taking action.
1) U.S. Small Business Administration
2) Arthur Andersen Center for Family Business, cited in
Your Company, Forecast 1997
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