The vast majority of businesses in New Mexico are small businesses that are individual or family enterprises.  Many people who have a small business have every intention of passing the business along to family members when they die.  However, taking the necessary steps to accomplish this feat is something that many business owners fail to do.  This means that business assets are lost and heirs and family members do not benefit from the hard work and industriousness of the entrepreneur who created the business.

The first step is to appoint someone to be in charge of the company in the event of your incapacity or death.  However, this is just the first step.  If you make full use of the business succession tools, you can minimize tax consequences from the transfer, avoid litigation brought by shareholders, put provisions in place to fund the transfer process, and implement protections for successor owners and managers.

Here are some considerations:

  • Lifetime Transfers – There are Internal Revenue Service rules and regulations that impact the lifetime estate transfers to beneficiaries and can be used to minimize gift and estate tax consequences.  Partnership and operating agreements can be drafted to facilitate the transfer of the business to family members in the most tax-advantaged way possible.
  • Testamentary Transfers – If the transfer of the business and its assets takes place after the death of the business owner, there are important considerations to minimize challenges by heirs and beneficiaries.  If the transfer is included with the distribution of the rest of the estate, then the comprehensive treatment can avoid hurt feelings and bring about contested wills.
  • Business Valuation – In order to facilitate the transfer of the business and its assets, it is important to have a plan in place for the valuation of the business at the time of transfer.

There are a number of things to ask yourself as you contemplate the future of your business:

  • Who is the best person to take the reins of the business in the future?  This is a difficult decision, but it is one to consider carefully if you want the business to be successful as a going venture.
  • When should you begin the process of transferring the business?  Although it is difficult to step down and hand control over to someone else when you have put your blood, sweat, and tears into growing the business, transferring the business while you are still available to act as a resource may ensure the future success of the business, which is part of your legacy.
  • What changes have to be made to the business structure to prevent the forced sale of assets to pay for the transfer process, including the possible buyout of shareholders?
  • When dealing with multiple heirs and beneficiaries, how do you ensure equal treatment between those involved with the business and those who will not be part of the succession plan?  Including the transfer of the business as part of the overall estate plan will allow for equality amongst the heirs, although the business valuation will have to be managed carefully.
  • Should I prepare an estate inventory? This analysis evaluates the assets and liabilities of the business may be a good first step in business succession planning.

There are many different options available to a business owner to facilitate a transfer of the business.  A Family Limited Partnership can take your business assets out of the taxable estate and transfer the value of those assets to your children while you maintain control of the business itself.  Another important tool is a buy-sell agreement that details how the transfer of ownership interests is to be effectuated in the event of a death of a business partner.  This agreement can set the value of the business upon transfer and dictate how the remaining partners will deal with the death of the partner and the treatment of the deceased partner’s heirs.

Business succession planning is an important part of the estate plan and experienced estate attorneys can help guide you through the process in order to protect the legacy that you have worked so hard to build.

The above information is provided to illustrate general principles of law and should not be interpreted as a specific legal opinion on an individual case.  You should contact experienced legal counsel to get specific legal advice that is based upon your specific circumstances.

If you have a business and want to make plans to ensure the transfer of the business to your family and heirs, Jay Goodman & Associates can help you accomplish all of your succession goals.  We offer a free consultation in our offices in Santa Fe and Albuquerque to discuss your goals and options.  We can evaluate your estate planning issues in light of the complications of transferring your business and explain your options.  In order to schedule your free consultation, please call us at (505) 989-8117.


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