For years, you have poured your time, resources, and sweat equity into your business. Now that it is time to look at your exit strategy, the decisions can feel just as intimidating and confusing as those early stages!
Your business can create a legacy for your family, whether or not you decide to pass it along to the next generation. There are financial strategies that can help fund your retirement and protect your loved ones, whether you are selling the business, passing on ownership, or navigating another transition.
Taxes
If you are getting ready to retire or exit your business, tax planning generally turns toward business succession and estate planning strategies. A good first step is to hire a business valuation service to provide a realistic value, since a large part of your overall net worth is probably in the business.
If yours is a family business, you may want to set up a Family Limited Partnership (FLP) and begin using the annual $19,000 gifting limit to transfer limited partnership interest to family members. An FLP also allows you to discount the value of the business, which lowers the taxable estate as well.
Make sure you are working with professionals that both you AND your family members trust. Depending on the size of your business, a Family office can be set up to provide financial and non-financial benefits for high-net-worth families, especially if your long-term vision includes future generations or philanthropic endeavors.
Estate Planning
If your net worth is upwards of $10m and your thoughts are turning toward exiting the business, then you need to be aware of the estate and gift tax exemption. Recent legislation did increase the estate tax exemption to $15,000,000. However, anything above that exemption will be taxed at 40%.
One aspect of estate planning that is especially important for small business owners is to provide access to liquidity. This allows your family to pay for taxes and final expenses while the estate is being settled. Trusts can help you with this. An Irrevocable Life Insurance Trust (ILIT) can hold a life insurance policy, removing it from your taxable estate to minimize estate taxes and control distribution. At death, proceeds are paid to the Trust and distributed to beneficiaries’ income and estate tax-free. Of course, the cash can be used as needed.
Another trust to consider is a Spousal Lifetime Income Trust (SLAT). This is established by making a gift, while both spouses are alive, to the SLAT using part of the lifetime gift exemption. This amount is then excluded from the grantor’s estate at death and provides your spouse with lifetime income from the trust, which can be passed down after their death to dependents.
Investing
At this stage, your motto may be “maximize returns, minimize risk.” While allocation is always important, it is especially crucial during events like retirement. You should work with your financial advisor to evaluate how your assets are structured and leveraged. Your advisor can recommend allocations that take into account your entire asset portfolio, whether that is a retirement account filled with stocks, alternative investments such as real estate, or your business itself.
There are lots of investment professionals competing for your time and money. Be sure you are working with a fiduciary. (Fiduciary advisors like Greenwood Capital have legal and ethical directives to only act in your best interest.) Your advisor can help you vet and recommend investments and match them to your risk profile and your personal exit goals.
Working with an advisor can help you navigate advanced tax strategies, complex investment options, and careful estate planning, so that you can step away with peace of mind. And if you’re not quite ready to let go, don’t let that stop you from creating a plan! Your advisor can help you evaluate your options so that you can start laying the foundation.
For many small business owners, a strategic exit is not just the bottom line. It can preserve years (or decades) of hard work. It can provide for your loved ones, even after you are gone. And it can create a lasting legacy for you and your family.
Melissa Bane, CPA, PFS®, CFP®, ChFC
Senior Private Client Advisor
As a Senior Private Client Advisor, Melissa’s top priority is to serve her clients. Her proactive approach blends thirty years of industry experience with compassion and understanding. She specializes in developing holistic financial solutions for business owners and helping women investors establish security and build wealth.
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The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.
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