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June 24, 2022

How Owning a Family Business Complicates Estate and Business Succession Planning

For small business owners, planning their estates and their companies' succession often overlap. If your venture is family owned and operated, a significant portion of your assets is invested in your business. 

Comprehensive estate planning is essential to ensure your organization continues after your passing. Failing to take the proper steps in preparing your company for this eventuality could mean additional financial and legal risks to sort out later.  

Management succession for separate ownership 

One of the challenging aspects of transferring your family business is distinguishing between a succession of ownership and management. Compared to third-party business sales, where ownership and management succession coincides, family-run companies may need to approach these processes separately. 

When considered through the lens of estate planning, it may be wiser to transfer your assets to the next generation sooner. This can further minimize any estate tax liability for your family and business because you've reduced future appreciation. Of course, you may not be willing to change leadership just yet if they aren't ready for the responsibility. 

Fortunately, there are several approaches you might consider that can enable you to transfer ownership of your family business while still retaining control: 

  • Consider using a family limited partnership, trust, or another ownership alternative to transfer most of the ownership interests to your future stakeholders without giving up managerial control 
  • Use nonvoting stock to transfer ownership
  • Create a stock ownership plan for your employees

Separating ownership and succession planning would be beneficial if you have family members who aren't part of your business. You can still share the wealth of your company's earnings by giving your beneficiaries nonvoting stock or forms of equity interests that don't give them any control over managing your business. This effectively prioritizes the rights of those who work for your organization. 

Resolving disputes

When planning your business succession, you may run into conflicts regarding the financial needs of the older and younger generations involved. This doesn't have to end in a tragic family rift since there are methods to create cash flow for owners while minimizing the burden on future company leadership and employees.  

Suppose you plan to sell your business to your beneficiaries through an installment sale. This creates liquidity and eases the financial burden placed on your children or other heirs. It's also possible that these generated cash flows can fund the purchase. You should be able to avoid gift and estate tax liabilities so long as transactions are much like arm's-length transactions between parties who aren't related. 

Start sooner than later

No matter what strategy you choose, planning works best when you begin early. By taking the time to transition your family business over several years or more, you get more time to share your succession philosophy and educate your family about it. 

Additionally, this makes it possible to give up control over time and create a business structure and process that are tax savvy. Contact our offices today to learn more about succession strategies that will support the unique goals you have for your family business. 

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