Business Owners Need to View Their Succession Planning as Their Legacy

Over the past 10 years, despite political and economic uncertainties, entrepreneurship and business ownership have helped to close the wealth gap and to create significant wealth for black/African American entrepreneurs. According to the U.S. Census Bureau 2012 survey (the most recent survey available), there are 27.6 million closely held small businesses in the U.S., of which 29% are majority-owned by ethnic minorities. In 2012, black/African American businesses totaled 2.6 million nationally, with total annual revenue of $187.5 billion, reflecting a 34.5% increase in business ownership, up from 1.9 million in 2007.

In fact, research confirms that business ownership and entrepreneurship are key drivers of significant wealth and legacy creation, irrespective of race, ethnicity, or gender. In an annual industry intelligence report, State of the Affluent–(published by CEG Worldwide, a leading research firm, and WealthEngine, a leader in wealth intelligence)–we learn that 33% of affluent, 74.5% of super affluent, and almost 90% of ultra-affluent households own a business.

The fact that the increase in black/African American-owned businesses represents the highest percentage increase in business ownership among all ethnic groups in the U.S. is important. For these entrepreneurs, an increase in business ownership also translates to significant increases in personal and family wealth, both for the current generation and for future generations. Urging his community toward building a firm foundation for business success, Earl G. Graves Sr., the founder of this publication, noted in a Nov. 3, 2015 publisher’s letter that: “[W]e as African Americans have the capacity to pass on more wealth than any previous generation–wealth needed to continue to finance the progress and empowerment of future generations.” However, citing that nearly 70% of African Americans have no will or estate plan in place, Graves went on to say that, “this potential cannot be realized if we don’t collectively commit to estate planning.”

Many business owners are discovering that with proactive, purposeful planning, much of the newly created wealth can be preserved and even passed onto future generations.

Owners of closely held businesses, in particular, should not only commit to estate planning but also to integrating business succession and exit strategies as part of their overall wealth plan. More than 4 out of 5 closely held businesses are still run by their founder. However, there is a disconnect between the 88% of business owners (according to the Family Business Institute) who believe that they will be able to pass their business onto the next generation, and business succession statistics, which show a decrease in business survival. According to The Family Firm Institute, only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.

In a separate 2015 study, 64% of business owners over the age of 50 have no formal business succession plan, which puts their largest asset and family’s wealth and security at risk (Five Attributes of Today’s Business Owners,” 2015 U.S. Trust Insights on Wealth and Worth).

So, what are the things to consider in establishing an estate and business succession plan? First, you will want to consider a few of the key objectives when working with your tax and legal advisers to create a plan, which are to:

1. Address and achieve certain financial and family objectives
2. Maintain privacy and control regarding your wealth
3. Maintain family harmony and ongoing viability of key assets
4. Maximize your wealth during your lifetime and for legacy and social impact
5. Preserve wealth from unnecessary taxation and claims of creditors
6. Minimize liability and claims against your wealth

Next, you and your attorney will want to consider how to properly structure and coordinate your wealth planning to maximize results. Some of the vehicles your attorney can draft for your planning objectives may include the following:

• Will — makes your intentions known and unambiguous and avoids having the state determine who will receive your wealth
• Revocable/Living Trust — avoids probate, which otherwise subjects your estate to probate fees and unnecessary public scrutiny
• Power of Attorney for assets in the event of mental incapacity
• Health Care POA/Directives — provide clear instruction on who will make healthcare decisions on your behalf if you are unable to make such decisions
• Irrevocable Trusts – for making intra-family wealth transfers in a manner that leverages available tax exemptions to enhance family legacy planning

Business owners will also want to consider:

• Shareholders Agreement (corporations), Partnership Agreement (partnerships), or Operating Agreement (limited liability companies) — establishes plan for managerial succession and instructions on what happens to your interest in the business in the event of death, disability, or retirement,
• Buy-sell Agreement — formal agreement for selling your interest in the business to an existing partner, family members, or third-party buyer
• Business valuation — for transfer of a business interest by gifting or sale. A proper business valuation should be considered before making any transfers to family members to address potential IRS challenges regarding valuation.

Because of the complexities involved with estate planning, especially when a successful business is involved, it is important that you assemble and tap into a team of experts to help you identify and navigate the planning issues. Your team will provide meaningful insight that will empower you to make better-informed decisions that will positively impact your community, business, and family legacy and wealth.

John Campbell is a wealth strategist for The Private Client Reserve of U.S. Bank, Chicago and works with business owners, CEOs and high net worth individuals. He has a B.A. from Yale University and a J.D. from Tulane Law School.

U.S. Bank and its representatives do not provide tax or legal advice. Each individual’s tax and financial situation is unique. Individuals should consult their tax and/or legal adviser for advice and information concerning their particular situation.