Family Business Estate Planning


Most people can handle the bulk of their estate planning with a last will and testament, but business owners who require a succession plan will need more than a simple will. Business owners need to address how their business interest will be divided and/or transferred, and if the succession plan isn’t laid out in painstaking detail, it may be subject to years of court battles over ownership by interested parties.

Estate Taxes (synonymous with Gift Taxes) can also be a monumental headache for business succession, so a good estate plan should include measures to minimize and avoid taxes as much as possible.

Interim Management

Even with careful planning, there will probably be a short period of time between your death and when your heir legally receives ownership of the company. Whether that period is a few days, a few weeks, or a couple of months, leaving clear instructions for your company makes everything a whole lot easier.

If there will be an interim director who controls the company during the transition, you’ll need to clearly delineate their responsibilities and the extent of their authority. To avoid panic from directors, consultants, lenders, shareholders, and key employees, leave a detailed succession plan that clearly ensures the future of your company. Failure to appease the legitimate concerns of these parties can lead to a mass exodus that cripples your company for years and leaves a mess for your heir.

Sole Ownership vs. Joint Ownership

Transferring interest in a solely-owned business is fairly straightforward. As long as your succession plan clearly names a successor and details the transfer of ownership, your biggest concern will probably be the tax implications. If you share ownership with one or more partners, the transfer can be complicated. In this case, the transfer will be almost entirely governed by the shareholder or partnership agreement.

Tax considerations

Remember, tax evasion is illegal, but tax avoidance is prudent. If you’re like most business owners, the majority of your assets are probably tied up with your company. If you’re not careful, your heir may be subject to estate taxes of up to 40% of the value of the company when your estate transfers ownership to them. If your business isn’t a cash cow, your heir will likely be forced to sell the company to settle the tax bill with the IRS, or they’ll need to take out a substantial loan to cover the cost of the transfer. Neither of those options are good for your heir or for the company that you worked so hard to build.

There are a few tax breaks you can take advantage of. Internal Revenue Code Section 303 allows an estate to redeem stock at a lower tax cost, and Section 6166 allows executors to set up an installment plan for estate taxes to avoid a crippling one-time payment.

You can also take advantage of the annual gift tax exemption by transferring ownership interest in your company gradually over time, at a value of $14,000 per year per person. For example, if you plan to split ownership between your son and your daughter, you can gift each of them $14,000 worth of business stock every year. By the time you pass away, that should bring down the ultimate value of remaining stock share to be transferred, which will lower the exposure to estate and gift taxes.

Living Trusts

There are three popular ways to transfer ownership of a business. First (and most popular for small businesses) is using a living trust.

Most estate attorneys recommend against using a will to transfer ownership of a company. Not only is probate court a public process that makes the private details of the business public record, it can also be time-consuming and expensive. Use your will to disposition assets that are subject to probate (personal belongings, the house, vehicles, etc.), and use a living trust to transfer your business interests.

Where a will offers directions on how your assets should be transferred, a trust actually takes ownership of the assets in question. In the case of a business, you can transfer your company stock to a revocable living trust. In this case, the trust would take ownership of the business, but you would retain control as the trustee, and you would continue to benefit from the profits as the beneficiary.

Because the trust is revocable, you also have the right to amend the terms of the trust at any time, and you can dissolve the trust and retake ownership of the assets if necessary. When you die, a successor trustee will take over management of the assets, and will administer the trust for the benefit of the successor beneficiary. Based on the terms of the trust, the business ownership can immediately pass to the beneficiary (outside of probate), or the trustee can dispense income and/or principal to the beneficiary until a definite point in time (e.g. when the heir turns 18, or graduates from college).

Note that while a living trust avoids probate, a revocable trust will still be subject to estate and gift taxes. If the value of your business interest is more than the estate tax threshold ($5.49 million for individuals and $11 million for married couples), then you’ll need to utilize an irrevocable trust. Irrevocable trusts are not subject to estate taxes, but you should exercise caution as assets transferred to an irrevocable trust cannot be reclaimed, and the trust cannot be amended or dissolved. Sometimes it’s better to bite the bullet for estate taxes than to relinquish control over the assets.

Buy-Sell Agreements

Buy-sell agreements are a popular choice for joint business owners, and are ideal for owners who want to create a succession plan without giving up the reins of the company until they’re ready. A buy-sell agreement dictates that at a given point in time (usually when the owner dies, becomes incapacitated, or retires), the owner must sell their interest to the buyer. The buyout essentially liquidates the original owner’s assets tied up in the business, making it much easier to transfer assets to their heirs.

Selling the Business

While a buy-sell agreement plans for an untimely death or unexpected incapacitation, business owners are free to retain ownership and simply sell the business when you’re ready. This usually takes place when the owner retires, or via instructions in their will when the owner dies. While this obviously means handing the reins of your company over to someone outside the family, it’s much easier to do estate planning for a liquid estate than it is for an estate with complicated and/or valuable illiquid business interests.

For long-term peace of mind, contact us to set up a consultation today. We look forward to helping with your will and other estate planning needs.

Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.

Contact The JacksonWhite Estate Team

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