It takes years to develop a business. You must still remember the first day you decided to practice privately and started looking for real estate to support your dreams. Sometimes decades pass between that day and the day your business is worth over $5 million. During all this time you were likely busy expanding your practice, acquiring more assets and taking care of your family. However, have you taken the right steps to protect your business? You must be aware of estate taxes and how owning a business can complicate your estate.
Take time to hatch a plan
Research says that most doctors are aware of the necessities of an advance medical directive, but they rarely choose to invest much thought in estate planning and business planning. In fact, many do not think of their private practice as a business. While it is kind of true, the IRS and the federal government do not seem to agree with this view. When a doctor passes away without making any legal arrangements and declarations, it is likely that his immediate successor (son or daughter) becomes the next in line to own the business. In such a case, they have to pay a hefty estate tax to claim the company, or they have to sell it without knowing the right selling price.
You need more than a will
It is a rather sad fate for a business which started as your endeavor. Would you want your business to step into tomorrow without a guaranteed future? Would you not like to convey your wishes about your business? While there are many doctors out there who think a will or a simple estate plan is enough to secure the future of their business, we strongly disagree. Just another will does not work towards tax efficient transfers.
You need something more detailed that will help you with the following challenges:
- It should help you preserve it and transfer it to your next generation without attracting a huge tax burden.
- It should also help you distribute the assets among your heirs equitably.
Why not start a Family Limited Partnership?
You can start by converting your sole proprietorship into a family-owned business. It might not be as difficult as you believe it to be right now. You can opt for a Family Limited Partnership that facilitates the prosperity of a family-owned business. It has formal agreements and clauses. Any doctor with a private practice can choose an FLP when he or she wants to consolidate management and reduce the estate transfer costs. Estate planning for small family-owned businesses is incomplete without a functional FLP.
You must take time to explain your succession plan and your decisions to your family. Although you have a family-owned business, it is likely that not all members of your family will be interested in the business. If you mention special directives to exclude certain family members from the partnership, you need to explain that to your partners too.
Divide the responsibility, keep the control
You can streamline the management of your company by structuring the company ownership. Divide the duties among the family members. You can own controlling interest by reserving both voting and non-voting stock for yourself. Having both managing and non-managing interests in a family limited partnership introduces a lot of flexibility in the estate. You can identify certain members of your family as the general partners. They reserve the voting stock, and they can legally control the decision-making process of your company. You can identify others as the limited partners. They can receive the economic benefits, yet cannot make critical decisions in the business.
Here is the fundamental principle most FLP owners follow while structuring their company ownership:
- Older people usually resume the charge of general partners since they are unwilling to surrender control of the family business.
- Older people might not have as much faith in the younger generations, and they like to reserve the decision-making rights.
- Both general and limited partners need two or more family members.
Split the profit to stay below exemption amount
Family limited partnerships provide significant tax benefits to the partners. According to the FLP, the partners or family members can split the business profit several ways. It brings the per head earning way below the federal tax exemption. It automatically becomes an IRS-approved way to reduce tax expenses. The splitting of the earnings depends on the respective partner’s role in the partnership or the company. You, as the owner of the business, can determine how the net earning is split among the family members.
FLP is flexible
Many doctors become concerned at the mention of an older member becoming the decision maker of the business. However, there is no reason to be worried. Unlike most trusts and estate planning arrangements, FLP is not irrevocable. In fact, there is a lot of room for changes. You can easily remove or replace an older member of the partnership. The FLP permits amendments of the partnership or termination of the same, when necessary.
Funding your FLP
If you are worried about the liquidity of business assets, you will be relieved to know that FLPs facilitate the acquisition of life insurance policies for business planning needs. Many doctors opt for life insurance during this time to facilitate their estate liquidity. For example – the partnership can acquire a life insurance policy on an older partner. When the elder partner passes away, the insurance benefits feed into the FLP, where the surviving members/partners can use this money to acquire more assets and possibly another life insurance. It is also a useful and practical way to secure the cash an estate needs to pay death taxes.
FLP is a robust planning tool with its unique tax and non-tax advantages. It is a convenient way to make gifts of multiple assets, asset transfer and transfer of partnerships more tax efficient. If you want a way to give away property without relinquishing control, a family limited partnership is what you need. The more illiquid assets in your business you have, the more tax-efficient your FLP can become. To offer your family owned business the security it deserves, do not wait any longer. Visit https://beamalife.com/ for the latest information on family limited partnership and estate planning.