Question: I have an engineering company and I want to put together a succession plan and exit strategy. I have three young engineers whom I would like to retain and eventually make co-owners. They would take over the business from me. How can I do this tax efficiently?
Answer: I usually use a structure called a preferred compensation plan for business owners who are in a similar position to you.
This needs to be carefully constructed so that it does not fall foul of any tax and labour laws. If done well, it will:
You need to do the following:
There are a couple of controls that you should put into the agreement.
For example, you can state that should the employee resign before the maturity date, the company may surrender the policy and keep the proceeds. You can also link the payment to certain short- and long-term goals being achieved.
There are tax benefits:
This type of structure is a great way to retain top people in the company and align their goals with yours. It also provides you with a nice vehicle to extract some capital from the business.
These are specialised products and you do need the right legal agreements in place to ensure that it is legally robust. Speak to a financial planner who is familiar with these structures.