Estate planning involves all of the assets in an individual’s estate including an ownership interest in a convenience store business. Thus, succession planning should be part of an estate plan — or undertaken before that estate plan.
Even more importantly, a succession plan for the business can help ensure that a closely held or family business, however big or small, will continue to operate successfully when the owner or owners exit, retire, pass away or are suddenly incapacitated.
As with estate planning, succession planning should start with a review of current transfer taxes — otherwise known as federal or state inheritance, gift or generation-skipping transfer taxes. The federal estate tax applies to a decedent’s gross estate, which usually includes the person’s financial and real assets.
The amount of an estate that can be excluded in 2022 is $12.06 million or $24.12 million for a married couple. The gift tax applies to transfers of money or property made while someone is living. The federal gift tax ranges between 18-40% and applies to the giver, not the recipient, for amounts above $16,000 in 2022.
Keeping in mind the estate and gift taxes, planning for succession is not a one-size-fits-all or one-time event. Generally, there are a number of transition strategies including:
The ESOP Option: An Employee Stock Ownership Plan or ESOP is an employee benefit plan that gives workers ownership interest in the convenience store business, in the form of shares of stock. ESOPs give the business — the selling shareholder — and participants a number of tax benefits, making them qualified plans in the eyes of the Internal Revenue Service (IRS).
FLPs: By controlling the business through a “family limited partnership” (FLP), owners get the added benefit of gifting shares at considerable discounts. An FLP can also assist in transferring a business interest to family members.
Gifts: Some succession plans involve outright gifts, rather than selling or transferring an interest in the business. An outright gift is the least complex, but most inefficient way to transfer wealth. A small annual gift under the limits can, as mentioned, be made to multiple parties without affecting lifetime exclusions necessary to avoid paying estate taxes.
Obviously, for any business with significant value it would require years to give it away. Fortunately, many convenience store owners can use their lifetime exclusions to transfer shares with no gift tax bill.
An Option of Trust: An increasingly common question that comes up in both estate tax and succession planning is, “Should the business be owned in a trust?” A trust can provide for the benefit of one or more children. If the cash flow from the convenience store business flows into the trust, the trustees can use their discretion, providing the flexibility needed to address the goals of the family.
Other Options: Obviously, there are many other options that the owners or shareholders in a convenience store or other business might consider, including a merger. A merger is one such option since joining with a competitor or related business ensures the business’ survival and growth.
Being acquired, on the other hand, might mean continued involvement with the operation with severance occurring down the road.
However, because a convenience store business that is acquired by another may not produce the results desired, there is always the option of a sale. An outright sale of the business usually results in the seller cutting all ties to his or her business.
Succession planning is critical in estate planning as well as for ensuring the continuation of any family-owned convenience store business. However, given the number and complexity of transition and succession options available, effective succession planning requires time and the assistance of outside advisers.