Helping Clients Transition a Business to the Next Generation

by Commonwealth Financial Network

When your clients rely on you to guide their family wealth planning, there are many inheritance issues you must address. Here, we’ll focus on just one of the concerns you may encounter when putting wealth transfer strategies into action: helping clients transition a business to the next generation.

Holding a family meeting is a great start when reviewing and refining your clients’ wealth transfer goals. It can help strengthen ties and resolve important planning matters by encouraging open discussion and allowing family members to ask questions about the client’s estate plan and portfolio.

Keep in mind that unexpected questions, challenges, and conflicts may arise during the discussion, which may prompt your client to reconsider some aspects of the plan. Even if the meeting doesn’t go as planned, however, this is a valuable part of the process. Getting issues and concerns out on the table can prevent conflict later and help ensure the successful deployment of the client’s estate plan.

Much thought and planning go into the initial family meeting, but it’s likely just the beginning of the wealth transfer conversation. Now, it’s time to take stock and assess the next steps. 

  • Did family dynamics shift when it came to discussing money?
  • Were there any conflicts between family members?
  • Are there issues that need to be resolved before moving forward?
  • What are the main concerns that require planning solutions?

For clients who own a business, succession planning is likely a key topic that you’ll need to address going forward.

One of the most important steps in transitioning a business to the next generation is communicating a vision for its future. After all, it was the current owner’s vision that got the business to where it is today. Losing sight of this could result in failure going forward. 

Be sure that the future owners understand where the company is going and how they will continue to guide it along that path. Communicating this vision well ahead of time will help prevent confusion and disagreements once the transition process begins.

There are a number of ways to transfer a family business to the next generation, and performing a proper business valuation is a necessity. Depending on your client’s circumstances and financial situation, he or she may want to sell the business, gift the business, or use some combination of the two strategies.

Gifting. If the client is in a strong financial position, he or she may decide to gift the business to children or other family members. Again, the value of the business will dictate the most efficient way to accomplish this. Often, it's possible for the client to transfer the business interest using the lifetime gift and estate tax exclusion ($5.49 million for 2017). If the business is co-owned by a spouse, this would allow for a transfer of property of up to $10.98 million with no transfer taxes. Of course, you’ll need to determine whether the client has already used any of his or her lifetime exclusion amount for prior gifts to children.

Selling. If the business is your client’s most valuable asset, he or she may need to sell it in order to support his or her retirement income needs. This can be achieved in several ways.

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