March 24, 2024 It’s been estimated that there are roughly 5 million family-owned businesses in the United States. Annually, these companies make substantial contributions to both employment figures and the gross domestic product. If you own a family business, one important issue to address is how to best weave together your family business succession plan with your estate plan. Table of Contents Rise to the challenge. Transferring ownership during a family business succession process is often difficult because of the distinction between ownership and management succession. From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing any estate taxes. However, you may not be ready to hand over control of your business or you may feel that your children aren’t yet ready to run the company. There are various ways to address this quandary, and exploring different strategies for family business succession can help address these common challenges. You could set up a family limited partnership, transfer non voting stock to heirs or establish an employee stock ownership plan. Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. Providing such heirs with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth with them while allowing those who work in the business to take over management. Consider an installment sale. An additional challenge to family businesses is that older and younger generations may have conflicting financial needs. Fortunately, family business succession strategies are available to generate cash flow for the owner while minimizing the burden on the next generation. For example, consider an installment sale. An installment sale can be a strategic component of a family business succession plan by providing liquidity for the owner while improving the chances that the younger generation’s purchase can be funded by cash flows from the business. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes. Explore trust types. When considering family business succession strategies, creating a trust offers a structured approach to transferring business interests with tax advantages. By transferring business interests to a grantor retained annuity trust (GRAT), for instance, the owner obtains a variety of gift and estate tax benefits (provided he or she survives the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s children or other beneficiaries. GRATs are typically designed to be gift-tax-free. There are other options as well, such as an installment sale to an intentionally defective grantor trust (IDGT). Essentially a properly structured IDGT allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once the installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes. Protect your legacy. Family-owned businesses play an important role in the U.S. economy. We can help you integrate your family business succession plan with your estate plan to protect both the company itself and your financial legacy. Our expertise in family business succession planning ensures that your legacy and the company you’ve built are protected for future generations.
