How to Navigate the Blurred Lines of Estate and Family Business Succession Planning

Owners of closely held businesses often have a significant portion of their wealth tied up in their enterprises. If you own a family business and don’t take proper estate planning steps to ensure its continuity after you're gone, you may be putting your family’s financial future at risk. Here’s how to effectively navigate the complexities of estate and family business succession planning.

Distinguishing Between Ownership and Management Succession

One major challenge in transferring a family-owned business is distinguishing between ownership and management succession. When a business is sold to a third party, these transitions typically occur simultaneously. However, in a family-owned business, there may be strategic 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 tax liability. However, you may not be ready to hand over the reins of your business, or you may feel that your children aren’t yet prepared to take over.

Strategies for Transferring Ownership While Retaining Control

There are several strategies to transfer ownership without immediately relinquishing control:

• Placing Business Interests in a Trust or Family Limited Partnership (FLP): These vehicles allow the owner to transfer substantial ownership interests to the younger generation while retaining management control.
• Transferring Ownership as Nonvoting Stock: This allows the next generation to gain equity without conferring immediate control.
• Establishing an Employee Stock Ownership Plan (ESOP): This can gradually transition ownership to employees while retaining control during the process.

Addressing Family Dynamics

Another reason to separate ownership and management succession is to address the interests of family members who aren’t involved in the business. Providing heirs outside the business with nonvoting stock or other equity interests can effectively share the wealth while allowing those actively involved in the business to manage it.

Anticipating and Managing Conflicts

Conflicts often arise in family businesses due to the differing financial needs and goals of the older and younger generations. Here are some strategies to balance these needs:

• Installment Sale to Family Members: This approach provides liquidity for the current owners while easing the financial burden on the younger generation. It can also be structured to avoid triggering gift or estate taxes if the terms are comparable to arm’s-length transactions.
• Grantor Retained Annuity Trust (GRAT): Transferring business interests to a GRAT offers gift and estate tax benefits while providing a fixed income stream to the grantor for a specified period. At the end of the term, the business is transferred to the children or other beneficiaries, typically gift-tax-free.

The Importance of Early Planning

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

The intersection of estate planning and family business succession planning can be complex, but with careful and strategic planning, you can navigate these blurred lines effectively. Working closely with your estate planning advisor is essential to tailor strategies that align with your unique objectives and resources, ensuring a smooth transition and the continued success of your family business.

HoganTaylor Estate Planning Services

HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning  Lead.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.