Family business focus: Addressing estate and succession planning

The future often weighs heavier on the shoulders of family business owners. Their companies aren’t just “going concerns” with operating assets, human resources and financial statements. The business usually holds a strong sentimental value and represents years of hard work involving many family members.

If this is the case for your company, an important issue to address is how to integrate estate planning and succession planning. Whereas a nonfamily business can simply be sold to new ownership with its own management, you may want to keep the company in the family. And that creates some distinctive challenges.

Question of control

From an estate planning perspective, transferring ownership of assets to the younger generation as early as possible allows you to remove future appreciation from your estate, thereby minimizing estate taxes. Proactive planning may be especially relevant today, given the federal estate and gift tax regime under the Tax Cuts and Jobs Act.

For 2025, the unified federal estate and gift tax exemption is $13.99 million ($27.98 million for a married couple). Absent congressional action, this lifetime exemption is scheduled to drop by about half after this year. As of this writing, Congress is working on tax legislation that could potentially extend the current high exemption amount.

However, when it comes to transferring ownership of a family business, you may not be ready to hand over the reins — or you may feel that your children (or others) aren’t yet ready to take over. You may also have family members who aren’t involved in the company. Providing these heirs with equity interests that don’t confer control is feasible with proper planning.

Vehicles to consider

Various vehicles may allow you to transfer family business interests without immediately giving up control. For example, if your company is structured as a C or S corporation, you can issue nonvoting stock. Doing so allows current owners to retain control over business decisions while transferring economic benefits to other family members.

Alternatively, there are several trust types to consider. These include a revocable living trust, an irrevocable trust, a grantor retained annuity trust and a family trust. Each has its own technical requirements, so you must choose carefully.

Then again, you could form a family limited partnership. This is a legal structure under which family members pool their assets for business or investment purposes while retaining control of the company and benefiting from tax advantages.

Finally, many family businesses are drawn to employee stock ownership plans (ESOPs). Indeed, an ESOP may be an effective way to transfer stock to family members who work in the company and other employees, while allowing owners to cash out some of their equity in the business.

You and other owners can use this liquidity to fund your retirements, diversify your portfolios or provide for family members who aren’t involved in the business. If an ESOP is structured properly, you can maintain control over the business for an extended period — even if the ESOP acquires most of the company’s stock.

Not easy, but important

For family businesses, addressing estate and succession planning isn’t easy, but it’s important. One thing all the aforementioned vehicles have in common is that implementing any of them will call for professional guidance, including your attorney. Please keep us in mind as well. We can help you manage the tax and cash flow implications of planning a sound financial future for your company and family.

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