If you’re among the baby boomers marching toward retirement, it’s critical that you develop a plan to transition yourself out of your leadership role in your construction company. Succession planning in the construction industry should cover everything from naming a successor to choosing the right method for shifting ownership to that successor and perhaps other family members.

Find the Best Candidate

The most important operational question addressed in any succession plan is, who will lead the enterprise? If your construction business is family-owned, finding a successor can be difficult. Family members may be qualified but have no interest in taking the reins. Or they may be interested but lack sufficient experience. And you might have to tiptoe around sensitive family issues, especially if you have more than one family member in the business or children from multiple marriages.

To deal with such challenges, take time now to develop future leaders. Identify children or other key employees you believe hold leadership potential and expose them to all aspects of running the business.

Give them a well-defined path to find out what they need to do to become leaders of the business. And design appropriate fringe benefit and deferred compensation plans, as well as incentive pay, to help retain them until you step down.

Make It a Family Affair

It’s important that you encourage the entire family, whether or not they’re active in the business to participate in the planning process and to understand the financial and personal consequences of an unsuccessful succession.

A common issue is how to equitably divide assets among heirs when only some of them will have control of or receive ownership interests in the business. If there are sufficient liquid assets, consider purchasing life insurance to provide for any children who won’t be involved in the business giving ownership interests to only those who will be involved. Or, establish a family trust to own and operate the business, so the entire family shares the risks and benefits.

Transfer Ownership

The simplest way to transferring ownership of your construction company is to sell it to family members, if they want to buy it and can afford it.

You can also transfer ownership by gifting interests over time, but there are potential gift tax liabilities associated with this approach and won’t generate an income stream to carry you through retirement. If you’re ready to make a larger transfer this year, you can take advantage of 2014’s gift tax exclusion amount of $14,000 ($28,000 filing jointly) to make tax-free gifts.

A trust may be a better alternative for transferring ownership without creating harsh tax obligations. One option is a grantor retained annuity trust (GRAT), which will provide you with income for a term of years and then distribute the remaining assets to your beneficiaries.

The transfer of assets into the GRAT is a taxable gift, but the annuity you receive reduces the value of the gift. Interest rates also affect the value of the gift. The current high gift tax exemption/low interest rate environment may make a GRAT especially attractive this year. But keep in mind that if you die before the end of the annuity period, the trust assets will be included in your estate and the tax advantages will be negated.

Get Your Advisors Involved

No matter whom you choose as your successor, get your Construction CPA, lawyer, insurance advisor and a family business consultant involved to help you assess your circumstances and create a workable succession plan.

Along with selecting a vehicle to transfer your assets, the plan should state to what extent you’ll stay involved with the company after you leave. If you stay too involved, you may inadvertently inhibit your successors from succeeding.

Your plan should create a management structure that will survive your departure and keep the business on sound financial footing while ensuring adequate liquidity to fund your retirement or a buyout. Include a buy-sell agreement in the succession plan. It allows you to restrict transfers of ownership interests, and can help minimize income and estate taxes.

Start Now – Contact Your Construction CPA

While everyone talks about the need for a succession plan, too few actually follow through with developing one. Because the person (or people) who’ll eventually take over your construction business needs to be groomed into a leader, it’s critical that you start the process at least several years before you plan to retire, and ideally a decade or more in advance of that target date.

For assistance developing a succession plan to transfer your construction business to family, employees or a third party, contact our dedicated group of Construction CPAs in Michigan, Houston or Ft. Lauderdale.