You've built and own a successful business. But the Smart Business article, "Five things you should know about estate planning for a family-owned business," asks if you've taken the necessary steps to sustain it. Your family, managers, and stakeholders need to have a firm grasp of your succession plan. Here are some pointers to help you with that planning:
Identify and prepare your successors. Smaller businesses may need someone to oversee a sale or liquidation. Communication with and buy-in by your team is critical. The group should have a clear understanding of your goals, what's intended and how to achieve it, way before the time comes.
Look at your liquidity needs. Business owners are often highly illiquid because of business value compared to other assets. Liquidity in your estate is important to provide for your family and replace your earnings. If estate tax is owed, your estate will need liquidity to pay those taxes or else face a forced sale of the business. Life insurance may be a good solution, with the structuring of life insurance policies through irrevocable trusts. The business itself could have a policy on you to help pay down debt, provide working capital, or replace your on-going contributions.
Structure company ownership to separate control from value. If you own a controlling interest in the company, issuing voting and non-voting stock (or managing and non-managing interests in a partnership or LLC) gives a lot of flexibility for your estate. One person or group can run the business and legally control it by owning the voting stock, and another group still can receive the economic benefits of ownership through non-voting stock without being involved in business operations. Having a trust to own both voting and non-voting stock is frequently better than outright ownership.
Reduce your estate tax liability. Federal estate tax of 40% applies to estates over $5.45 million and $10.9 million for married couples. Consider decreasing that liability with some wealth-transfer planning. An owner of a profitable, cash-flowing business could transfer wealth out of the owner's taxable estate and into trusts for family at little to no gift tax costs through installment sales of stock to irrevocable "defective" grantor trusts (IDGTs) and funding grantor retained annuity trusts (GRATs.). These reduce the need to purchase life insurance or set aside liquid assets in your estate to pay the tax. Talk with a qualified estate planning attorney to properly implement them.
Estate planning for a family business owner is a complex and on-going proposition. Work with an experienced estate planning attorney to address the points above to help you reach the best outcome.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: Smart Business (March 18, 2016) "Five things you should know about estate planning for a family-owned business"