Succession planning poses unique set of challenges for a private business owner and the company. It has been found that the survival rate of a privately held business from one generation to the next depends, in part, on the caliber of the succession plan.
When a shareholder, family, or group of shareholders is contemplating or creating a succession plan there are many considerations. Quite often major considerations include: financial equalization for family members who are not active in the business, the method of funding a sale of corporate shares from one generation to the next or between unrelated shareholders, corporate and personal liquidity during an ownership restructuring and the efficient transfer wealth from the company to the shareholders and their family members.
One common planning strategy is an estate freeze which may or may not include a family trust. An estate freeze is designed to crystallize a shareholders current tax liability and transfers the future tax burden to either the new shareholders or the beneficiaries of the trust. Where a trust structure is in place an important succession planning consideration is the 21-year rule.
When a business owner utilizes a tax-exempt life insurance platform in conjunction with an estate freeze or trust structure the benefits to the shareholders or the beneficiaries of the trust are enhanced as life insurance creates a prompt source of tax-free cash when it is often required most.
Tax-exempt life insurance can be used to enhance many current personal and corporate tax efficiencies; it creates a source of consumption or retirement capital for more senior shareholders, it can create a source of succession capital for future generations or junior shareholders, and when structured properly deductible cash flows can be created if possible.
Succession planning is often left to the last minute as it is a challenging and time consuming process. The best way to avoid making last minute decisions is to explore all of your options well in advance of a succession event occurring. Understanding the benefits tax-exempt life insurance can provide to this planning process is critical when making informed succession planning decisions.