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Does Your Retirement Plan Consider Family?

Does Your Retirement Plan Consider Family?

January 27, 2023

An owner’s family directly impacts their business decision-making. Everything the business owner does, impacts the family directly and the families of their employees, partners, and vendors.

Research from our 2021 New York State of Owner Readiness Report showed that 84% of owners stated they meet with their family annually to discuss their business, and 12% of owners consider their spouse to be their most trusted advisor. Some owners will set up a family council similar to a business board of advisors. They assist in managing disputes between the family and the business. When an owner sells likely their largest asset, it greatly impacts the family. How will you integrate your business exit strategy with your personal purpose?

The Impact of Exit Planning on Your Taxes and Estate Planning

Of those owners who had a written transition plan, only 27% said it included an estate plan, and only 29% included a tax plan, according to our latest State of Owner Readiness Report. An estate plan is important for every individual, but especially for a business owner looking to exit their business. Traditional estate plans include a trust (full funded/titled), will, power of attorney, health care directives, HIPAA, and assignments. Business owners’ estate plans include traditional documents that must integrate the business entity planning, control, operations, and planning for the owner’s disability or death, as well as income, capital gains, and estate tax planning for now and into the future.

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Taxes, fees, and the cost of the sale of your business can greatly decrease your net proceeds. Owners have traditionally run their businesses planning for a net income after income taxes. During the sale, an owner must consider that year’s income tax ramifications, income and/or capital gains taxes due to the sale, and an eventual estate tax. There are legal, tax, and financial planning strategies that, when timed, combined, and sequenced, can either radically reduce or delay the tax such that the math of after-sale cash flow comes close to the owner’s desired outcome.

Planning for The Next Generation of Your Family Business

The characteristics that make a business valuable to a third party are the same that make it valuable to the next generation: low risk and high transferable value. The personal and business actions needed to transition a business successfully are the same as those needed to develop the next generation of family business owners. Utilizing value acceleration leads exiting owners to more successful intergenerational transitions.

Isabel C. Botero, Ph.D., the Director of the Family Business Center and an associate professor of entrepreneurship at the University of Louisville, shares, “Transition in family businesses is dependent on the readiness of current generation, the next generation, the family, and the business. Thus, the challenges that the family business owner faces are likely to be around these four issues.”

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Beyond the owner and their family, the significance of a successful business asset transition is substantial. Failure to provide for the continuity of the business impacts not only an owner’s personal wealth and that of their family but also the future of all other stakeholders who depend on the business’s successful transition. In a recent Exit Planning Institute report, 41% of owners stated they preferred a family transition as their exit option.

Preparing Your Family for Transition

The complexity of family dynamics is always challenging, especially when they involve a business transition. In addition to being complex, another reason why most family transitions are not successful is business owners tend to do less transition planning when they have decided to transfer the business to the family. The family should approach an intergenerational transition with the same vigor as they would if they were planning to sell it to a third party.

At a certain level of wealth, families begin to explore governance around its preservation, use, and distribution. In traditional approaches, a family’s fear of negative outcomes is often met with the creation of rule sets: who’s allowed to do what and when.

By having annual family meetings to discuss the possible succession plans for the company, as an owner, you will be more prepared for an exit when the time comes. During these family meetings, any members of the family working in the business will have the opportunity to have their business suggestions heard. Those not working in the business will also gain a deeper understanding of the inner workings of the business as well.

Isabel Botero echoes this sentiment, saying, “Given this, as a family is preparing the next generation to be part of the business, they need to also work with that generation so they can discuss how they want to work together, what is their shared vision, shared purpose, and shared values. Having discussions about these goals really helps the family understand whether they want to work together or not.”

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. Integrity Benefit Partners is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. 200 Clarendon Street, 19th & 25th Floors. Boston, MA 02116. 617-585-4500. CRN202507-2694019.