Do you own a closely held business? Most business owners are critical to their organization’s continued operations. Plus, their businesses are likely their most valuable asset. If you retire or unexpectedly become disabled or die without appropriate plans in place, your business could be in turmoil — and your loved ones might not be financially secure — during the transition period.

Succession Planning

A succession plan outlines the structure of the business going forward and prepares for the eventual transfer of the business. This may include providing you and your family with an ongoing income stream from the business after your departure. It’s important to start thinking about succession planning now, even if you’re young and healthy — just in case.

The first step is to identify leaders in your organization who might have the skills, traits, and desire to take over your role in the business. For family-owned businesses, this may be your children or other loved ones. For other businesses, members of your existing management team may be able and willing to take on more responsibility with your help. In some situations, you may need to recruit outside talent to manage the business. Open, honest discussions with successor candidates are essential to the viability of your plan. Often, owners select multiple candidates to hedge their bets.

Once potential successors have been selected, you’ll need to train and mentor them. Consider testing their abilities on special projects, giving them the opportunity to complete these tasks independently. Remember: failures can be learning opportunities. You might also arrange special compensation for your successors.

One section of your succession plan should include all the financial details reflecting assets, liabilities, and current market value. Your plan should be in writing, and you’ll need to review it periodically as circumstances change. Communicate the plan clearly and transparently to your staff, family members, and business partners to help manage expectations and avoid dissent when you leave the business.

Estate Planning

A comprehensive estate plan includes several key documents. Of course, you’ll need a will to divvy up assets, including your business interest, among designated beneficiaries. Without a valid will or other appropriate arrangements, assets will be distributed under the prevailing laws in your state, which might not align with your wishes.

You should also assign power of attorney to someone who can manage your affairs and conduct business transactions if you become incapacitated. In addition, health care directives can ensure medical decisions are made according to your wishes.

Business assets require more customized estate planning. For example, some states may prohibit a spouse from accessing these assets without court approval. You may be able to place business interest into a trust to avoid this result.

When crafting your estate plan, you might want to transfer business interests to family members before you die to take advantage of today’s generous federal gift and estate tax exemption. In 2024, you can make gifts of up to $18,000 ($36,000 for married couples) without triggering gift tax. In addition, for 2024, the federal gift and estate tax exemption can shield transfers of assets valued up to $13.61 million ($27.22 million for married couples). Anything above the exemption will be taxed at 40%. Starting in 2026, the exemption is scheduled to be reduced to an inflation-adjusted $5 million ($10 million for married couples).

Warning: Some states — such as Connecticut, Massachusetts, New Jersey, New York, Rhode Island, and Vermont — also impose their own estate or inheritance tax.

If you don’t want to make direct gifts of business interests to loved ones, there are estate planning tools that can transfer assets out of your estate while allowing you to retain control over the day-to-day operations of your business.

For instance, you could set up a family limited partnership (FLP) and transfer your business to it. Under this strategy, you’d retain a small general partnership interest and transfer limited partnership interests to your loved ones. Because limited partners lack control over daily operations and the interests have limited marketability, their value may be substantially discounted from the value of the entire business. This strategy removes limited partner interests from your taxable estate, along with any future appreciation on the interests.