GRAND RAPIDS — In looking to the future and planning their personal finances and the day they pass along their company to somebody else, business owners need to remember that the two are not mutually exclusive.
Personal financial and estate planning and business succession preparation need to go hand-in-hand, said Tom Jeakle of the Prangley Marks accounting firm in Grand Rapids.
If not, neither kind of plan will be very effective for the business owner, Jeakle said.
“They really are inseparable. In order to do an effective plan, you have to do both sides,” he said of the need to take the value of your business and personal estate into account when planning for the future.
“You have to know both sides of it or it’s not going to come out where you want it to come out,” Jeakle said.
He explained that business owners have a myriad of options to pursue in personal financial and in business succession planning.
One tool that’s gaining in popularity enables business owners to gradually transfer their assets in a company to a family member over time and, in the process, lower everyone’s tax bill.
Under a Family Limited Partnership, he explained, a business owner can transfer their stake in the business to a child, as long as the gift is less than 50 percent of the owner’s holding. They can then take a discount on the gift, lowering their personal value and their tax bill, Jeakle said.
He said a family limited partnership works well for a “good size” family business and is used more frequently today as courts uphold the practice and reject IRS challenges to it.
“People are starting to get a little more familiar with it and tax advisors are getting more familiar with it,” Jeakle said.
In working with business owners, Jeakle says he long ago learned there’s no single solution that works for everybody.
Clients come with diverse backgrounds — single, married, children, no children — and their situations differ greatly, which is why business owners should be willing to consider a variety of options in their planning.
“Everyone comes with different problems,” Jeakle said. “It’s just a whole myriad of possibilities.”
The Financial Planning Association, a national trade group for financial planners, cautioned small business owners against the typical practice of putting most of their money into their firms.
The association stresses that such a move comes with a considerable amount of risk given that most new businesses either don’t survive or don’t quite achieve their founders’ expectations.
The association recommends that small business owners remember the fundamental rule of investing and maintain diversity in their assets. The first step, the association says, is to draft an investment plan, either on their own or with help from a professional.