Business Succession Planning for Small Business Owners in Florida

Coral Gables, Miami & South Florida Business Planning Law Firm

A family business that took decades to build can be destroyed overnight; the retirement, disability or death of a family business owner (or a key employee) can ultimately cause a family business to shut its doors. Unfortunately, most family businesses fail upon transferring their ownership without careful coordination of financial and estate plans.

Why Family Businesses Do Not Survive

Why is there such a dismal success rate for family businesses after a transfer in ownership? Many of the failed transfers can be attributed to three factors: people, taxes and cash.

A family business that took decades to build can be destroyed overnight; the retirement, disability or death of a family business owner (or a key employee) can ultimately cause a family business to shut its doors.

Family Business Owners and Estate Planning

If you operate a family business, you must ask yourself the following questions:

  • Who will run the business after you? Will it be your spouse, your children, or a non-family member key employee?
  • If your spouse will not run the business, will they still be financially dependent on it? Have you made arrangements to ensure that your spouse will be financially independent without income from the business?
  • What arrangements have you made for the inheritance of your children who are not active in the business?
  • Have you protected your business from any future claims by a son or daughter-in-law?
  • Thinking ahead to transfers of your business in the future, what provisions have you made to encourage thrift and industry among your grandchildren?

Coordinating Financial and Estate Plans

Without proper planning, your family business might be sold just to pay your estate tax liability.

If financial plans and estate plans are not carefully coordinated, there may not be enough cash reserves to fund your business succession plan objectives. A properly funded estate plan can meet your business succession objectives and simultaneously provide liquidity for estate taxes (or other business debts). Life insurance is commonly used to provide liquidity for business succession plans.

The Business Buy-Sell Agreement (BSA)

A BSA is a lifetime contract providing for the transfer of a business interest upon the occurrence of one or more triggering events. Common triggering events include the retirement, disability or death of the business owner. An interest in any form of business entity can be transferred under a BSA, to include a corporation, a partnership or a limited liability company. A BSA is binding on third parties, such as the estate representatives or the heirs of the business owner.

A BSA can be invaluable for a business owner who would like to ensure the smooth transition of control and ownership of their business. Subject to certain Family Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a value for the business that is binding on the IRS for federal estate tax purposes, as provided under Internal Revenue Code § 2703.

Entity Buy-Sell, Cross-Purchase Buy-Sell
and Wait-and-See Buy-Sell Agreements

A BSA is commonly structured in one of three general formats: an Entity BSA, a Cross-Purchase BSA or a Wait-And-See BSA. Under an Entity BSA, the business entity itself agrees to purchase the interest of a business owner. Conversely, under a Cross-Purchase BSA, the business owners agree to purchase each other’s interest. The Wait-And-See BSA gives the entity a first option to purchase the interest before the remaining business owner(s).

In addition to the three most common BSA formats, a One-Way BSA may be used when there is a sole business owner and the purchaser is an unaffiliated third party. Selection of the appropriate BSA format is critical for a variety of tax and non-tax reasons.

Funding a Buy-Sell Agreement

No BSA is complete without a proper funding plan.

Some common strategies for funding the purchase obligation under a BSA include the use of personal funds, the use of borrowed funds, the creation of a sinking fund in the business itself, an installment sale, and the use of life insurance benefits. The acquisition of insurance for the parties to a BSA is the only strategy that can guarantee proper funding. Accordingly, a BSA should include both disability buy-out insurance as well as life insurance coverage. Any delay in applying for insurance coverage increases the chances for complications in the underwriting process (such a new medical condition or even a traffic ticket), which could be fatal to the execution of a BSA — and thus, to the business itself.

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Probate is one manner in which estate assets are transferred after death. Since probate can be a lengthy, costly and public process, many people choose to avoid it. Without proper probate avoidance planning, the state will require a probate court proceeding for state residents or those who owned assets in the state. During probate, assets are managed, debts are paid, tax returns are filed along with various court documents, and the estate assets are distributed.

In the absence of any planning to the contrary, your estate will be distributed according to Florida's laws of intestacy. This so-called "default" estate plan might not reflect your wishes. However, if you do plan in advance, you can have your estate administered according to your preferences. A comprehensive estate plan may include a Last Will and Testament, Trusts, Powers of Attorney, Advance Directives and Health Care Documents, all supporting your legal, personal, investment and tax planning purposes.

As our population ages, more and more people will confront elder law-related issues. Elder law is an aspect of estate planning that focuses primarily on the changing needs of people as they age. Careful planning can help you avoid spending down your assets on long-term care. Issues include senior housing and home care, long-term care, or nursing home care, guardianships, health care documents, Medicare planning, and Medicaid planning.

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South Florida Estate Planning Attorney Brian C. Perlin, assists clients with Estate Planning, Elder Law, Probate Court, Probate & Estate Administration, Long-Term Care, Medicaid Planning, Veterans Benefits, Charitable Planning, Special Needs Planning, Estate Tax Planning, Business Succession and Asset Protection, in the cities of Miami, Coral Gables, and Kendal, Florida, and the surrounding areas.


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