estate planning with a family business
estate planning with a family business

What you should know about estate planning with a family business

While building a successful family business takes a significant amount of time, effort and money, it can all come toppling down if you haven’t created a strong estate plan. According to PwC’s 10th Global Family Business Survey insights, family businesses make up more than half the world’s GDP and are massive contributors to social and skills development, job creation, and bridging the digital divide. For this value to transfer to the next generation, getting professional assistance in estate and succession planning is vital. Further, estate planning with a family business requires more decisions than a traditional estate plan, so it’s critical to partner with the right advisor.

For many people, the pandemic highlighted the need to have an up-to-date estate plan. However, according to the PwC survey, only one-third (34%) of U.S. family business owners say they have a robust, documented, and communicated succession plan in place. While many family business leaders have at least an informal succession plan in place, only a small minority have fully documented and communicated those plans for all essential parties. While an estate plan and a succession plan contain different elements, they are closely related for families with a business.

What is succession planning?

Succession planning involves planning for smooth and effective business operations for the next generations. Succession planning details:

  • The viability of the business for the next generation
  • Which family members will be part of the business 
  • A vision for future business growth
  • Whether the business will be sold
  • If the next owner is trained and qualified to take over

What is estate planning?

Estate planning refers to the assets in an individual’s estate, which includes ownership interests connected to the business. An estate plan includes:

  • The amount required for the heirs’ financial security
  • The individual’s assets and potential tax requirements
  • The number and types of investments and insurance policies
  • The plan for healthcare directives
  • The plan for the distribution of assets

What are the risks of operating a business without estate and succession plans in place?

Without proper guidance in estate planning, you’re opening up your family—and the business—to some incredible risks, financially and personally. Some of these include:

  • Unforeseen probate court costs
  • Unforeseen estate tax liability
  • Delays in the distribution of assets
  • Potential litigation costs owing from disgruntled family members

Further, the process of settling your estate and carrying forward with business operations is a difficult one for grieving family members. Doing so without clear instructions only serves to complicate matters.

What do you need to consider when estate planning with a family business?

While there are different requirements for estate and succession planning, they are closely related in family businesses where a significant portion of the owner’s wealth is tied up in the business. There are many misconceptions related to estate planning, so here are a few key things to consider. 

Transfer of assets

The earlier you transfer assets to the next generation, the better, as this removes future appreciation on your estate—which translates to higher estate taxes. However, if the next generation is not yet ready to take on the estate, there are some strategies to transfer ownership without relinquishing control. These include:

  • Establishing an employee stock ownership plan (ESOP), which is a trust whereby cash can be used to buy shares from the company founders. These shares are then held in the trust and owned by the ESOP, benefiting employees participating in this trust.
  • Using non-voting stock to transfer ownership to the next generation.
  • Creating a trust or family-limited partnership for the business interests. This allows the owner to transfer ownership interests while retaining management control.

Separate ownership and management succession

If you have family members who aren’t involved in the business but still require a share of the wealth, then you can provide them with non-voting stock or other equity interests that don’t provide any business control. This creates much more flexibility in your estate.

Address liquidity needs

Different generations are likely to have different financial needs, so your estate planning will need to account for this through strategies that generate cash flow now—without creating a financial burden on future generations. One way to do this is by structuring an installment sale of the business to heirs for increased liquidity. Remember that you’ll need liquidity when estate tax comes due, and life insurance can be helpful in this area. These policies should be structured through irrevocable trusts.

Start estate planning early

If you want to reduce your estate tax liability, it’s important to start your estate planning now. Some of the strategies to minimize tax include lifetime wealth-transfer planning, whereby you transfer wealth from the estate into family trusts with minimal gift tax costs. Other strategies include installment sales of stock to irrevocable defective grantor trusts (IDGTs) and funding grantor-retained annuity trusts (GRATs). Starting early is vital as these opportunities might not remain available in the shifting legislative landscape. 

Get your succession plan in place

As we mentioned, estate and succession planning go hand-in-hand, and it’s important that your family and other business stakeholders understand your plans. The succession plan includes identifying and preparing successors, or appointing someone to oversee a sale or liquidation. Be sure that everyone is clear on the plan and your goals. 

If you have a family office (or are considering starting a family office) and haven’t initiated estate planning, then it’s time to secure the services of specialized financial advisors who can assist you in the process of estate planning with a family business.

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