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Estate Planning and Business Succession Planning: the Lines Blur with a Family Business

Posted by Melanie Abigania and Jessica Simons on Jun 2, 2022 12:30:00 AM

Family Business PlannerFor many business owners, estate planning and succession planning go hand in hand. As the owner of a closely held business, you likely have a significant portion of your wealth tied up in the business. If you don’t take the proper estate planning steps to ensure that the business lives on after you’re gone, you may be placing your family at risk.

Separate ownership and management succession

One reason transferring a family business can be a challenge is the distinction between ownership and management succession. When a business is sold to a third party, ownership and management succession typically happen simultaneously. But in the context of a family business, there may be reasons to separate the two.

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 due after your death. On the other hand, you may not be ready to hand over the reins or you may feel that your children aren’t ready to take over.

There are strategies family business owners can use to transfer ownership without immediately giving up control, including:

  • Transferring ownership to the next generation in the form of nonvoting stock,
  • Placing business interests in a trust, family limited partnership or other vehicle that allows the owner to transfer substantial ownership interests to the younger generation while retaining management control, or
  • Establishing 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 heirs outside the business with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth while allowing those who work in the business to take over management.

Work around conflicts

Another unique challenge presented by a family business is that the older and younger generations may have conflicting financial needs. Fortunately, there are strategies available to generate cash flow for the owner while minimizing the burden on the next generation.

For example, you may want to structure an installment sale of the business to your heirs. This option can provide you liquidity while easing the burden on your adult children or other heirs. It may also improve the chances that the purchase can be funded by cash flows from the business. Plus, as long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate tax.

Get an early start

Regardless of your strategy, the earlier you start planning the better. Transitioning the business gradually over several years or even a decade or more gives you time to educate family members about your succession planning philosophy. It also allows you to relinquish control over time, and to implement tax-efficient business structures and transfer strategies. 

Topics: Estate Planning

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