Family businesses are the foundation of the American economy, generating billions in revenue and millions of jobs. Ninety percent of the 20 million U.S. businesses are family-owned, and one-third of Fortune 500 companies are either family-owned or family-controlled, according to the U.S. Small Business Administration.

But what happens to your family business when it's time for you to retire? Or when you die? Studies show that 30 percent of closely held corporations survive to the second generation. Unfortunately, only 10 percent survive to the third generation of leadership—why the drastic downturn?

Quite simply, many business owners fail to create a succession plan. There are many reasons why this occurs—they're not ready to give up control of a thriving enterprise, or they haven't the confidence in any one senior manager to take charge. And if family members are involved, causing conflict among them is something business owners would rather avoid.

Often the business and its owner die on the same day, smacking the family with tremendous emotional distress, coupled with losing the main, guiding beacon that led the organization for so many years. In an instant, two great lights can be extinguished. Sometimes the family business cannot survive after the founder dies—it may be sacrificed on the auctioneer's altar to a buyer bargain-shopping for a deal.

Failure to create a succession plan may cause your business more harm in the long run, jeopardizing all you've worked for, and possibly the family fortune. The estate taxes alone may devour 46 percent of the deceased's assets (add state inheritance taxes) and family members may have to hock other assets and life insurance, too. Good employees lose their jobs; your family loses the full value of the business. It's a lose-lose predicament that is avoidable with a win-win succession plan.

If you die without a succession plan, your will and trust dictates how stock is divided, and that may not be the best choice for preserving the business and protecting your children. There are several transition options you can discuss with your advisors to decide which better serves you, your family and your business. These are important succession planning items to consider. If one of these is lacking, your plan is incomplete:

• What type of corporation do you have?

• How are the family members involved in the business?

• How will you transition stock to the next generation?

• How do you secure retirement income?

• How do you minimize personal and corporate taxes for the transition?

• How do you write wills and trusts that protect you, your family and your business?

As important as estate planning, succession planning provides a roadmap for new leadership in a closely held business. With a properly packaged plan, your business will thrive, your assets will be protected and the family's wealth will grow.

Most closely held businesses are S-corporations; those 40 years old and older may be C-corporations, and others may be limited liability companies or family limited partnerships. Your professional advisory team must know which type you have, its outstanding shares, and whether those are voting or non-voting shares.

Your corporate book is also important. Have you looked at it lately? When was the last time you documented corporate minutes after a board meeting? If you can answer these two questions, you're doing better than most business owners.

If your company has multiple stockholders, a valid stock redemption agreement (commonly called a buy-sell agreement) is another important document. It must have provisions that control stock for all stockholders in cases of death, divorce, disability, termination and retirement. Ninety-nine percent of all stock redemption agreements I see lack these provisions. Often I tell clients that stock redemption agreements are probably more important than wills and trusts. Inevitably, family emergencies happen—a premature death, a divorce, bankruptcy. A properly prepared stock redemption agreement protects your company stock from these crises.

Other important items to review are assets inside the corporation. As you develop a succession plan, your advisors must know how many receivables, as well as how much inventory and real estate, the company has. This will vary. For example, a retail lumber yard may have an abundance of inventory and receivables. Normally, real estate and other assets should be kept separate from the main operating business. This makes sense in cases of potential litigation. And gifting of stock becomes easier for owners, too.

Being fair to family members is always a difficult decision during succession planning. I always get questions like, “What should I do for my child who has worked 10 years for the company and has done a good job?” and, “What is a fair way for me to treat my children who chose careers outside the business?”Another hard question is, “I have three children working in the business. How can I find a fair way to treat each one regarding stock ownership and annual income?”

During succession planning, you should receive good advice about how to reward children working in the business while being fair to others pursuing different careers. Children working inside the business are entitled to own the lion's share (at least 51 percent, if not more) of voting stock. You may consider giving the others non-voting shares, real estate or other assets, such as life insurance and IRAs.

Furthermore, because the children working for the business are contributing to its growth, establishing provisions for them to buy out their siblings' stock (if in fact you split it) is an option to consider. If stock is divided between siblings inside and outside the company, create an obvious choice for children working outside the business to sell their stock to their siblings inside.

If you decide to gift income-producing real estate from a holding company to children not working in the business, it's important to prepare leases in advance, to establish fair rent. This is one of the more involved portions of succession planning, but also one of the most important in order to side-step familial conflict later.

Some parents want to gift all the stock to the children because they don't need additional income. If you want extra retirement income, gifting in large sums may be counter productive. By gifting between 30 percent and 40 percent of an organization's stock—devising a purchase plan for the remaining shares—you could receive 10 to 15 years of installment payments. To develop a gifting and sales approach for children, you need to prepare a valuation on the stock. This report gives you a value for any minority company shares if you are gifting some to your children.

Double taxation requires C-corporation transition plans to be handled differently. Creating two companies, one that owns the operating assets and another that owns the real estate holdings, reduces this problem.

Once you have a comprehensive succession plan in place for you, your family and your business, all that's left is securing your retirement income. It's okay to travel. Tahiti is nice any time of the year. However, some retirees prefer to work part-time for their old company, substituting for the sick and vacationing. This provides you with a chance to keep busy while being an invaluable resource to the organization. Another option is receiving compensation by sitting on the board of directors. However, the most popular options are consulting and deferred compensation agreements.

If part of your plan involves selling some of your stock to the next generation by using an installment note, then you will continue to earn from the note payments for many years.

Perhaps you decide to completely remove yourself from the day-to-day operations of the company, and your organization has a qualified retirement program. Consider rolling your company account into an individual retirement account. You can start receiving retirement income six months after your 59th birthday; however, you must begin withdrawing a minimum amount six months after your 70th birthday.

When you are designing agreements such as deferred compensation, be sure to tell your attorneys that you want payments to continue while you are living and to continue for your spouse after your death. For example, if the deferred compensation agreement is required to pay over 10 years, and you die unexpectedly in five years, some form of that income should continue to your spouse for the remaining five years.

During payoff, a comprehensive succession plan will also calculate estimates of income taxes the owner and children will pay now and in the future. For example, if you sold 100 percent of company stock to your children in an installment note, your current long-term capital gains tax is 15 percent. Unfortunately, children who make payments to you every month cannot deduct any of that note's principal payments. Therefore, they must generate higher income, pay taxes on that and use the remaining cash to pay the installment note.

On the other hand, if the children pay you deferred compensation, they, or the company, can deduct your payments from their taxes. Your deferred compensation payments are income, taxed at your current tax bracket.

You must have flexible wills and trusts to protect your business assets. For example, your will and trust can dictate which assets and what percentage of the estate certain children receive. In an untimely death, executors or trustees will be empowered to finish your succession plan.

As part of this planning, create wills and revocable living trusts for your stock-owning children. By having these prepared, you've created another layer of protection for the stock and the company. For example, if the children own their stock inside a revocable living trust, and they die unexpectedly, the trust controls the stock again. A trustee must follow provisions of the stock redemption agreement that are applicable to long-term control of the company stock.

Comprehensive succession planning creates layers of protection for you, your family and your business. It helps you identify qualified people in your organization to groom for the top office. It helps you gain control over stock and business assets—which is especially important in times of crisis. And it helps you treat all of your children fairly and equitably, whether they work inside or outside of the company.