Estate Planning and Business Succession Planning Can Go Hand in Hand
For an owner of a closely held business, estate planning and business succession planning are both ways to achieve the smooth transition of wealth across generations. Owners often wish to give their children or other relatives interests in the business, which can reduce the owner’s estate tax burden while also taking advantage of annual gift tax exclusions. However, the owner usually wants to transfer interests without relinquishing control. This can be effectively managed through special planning techniques.
One effective planning method is gifting limited, nonvoting shares in a family limited partnership (FLP) or a family limited liability company (LLC). These transfers allow the owner to continue manage the business as the general partner or managing member and gives the recipients a proportionate share of the profits of the enterprise. This setup reduces the owner’s taxable estate and offers favorable gift tax treatment, since limited interests are valued at a discount from the controlling shares of the entity. It also allows the younger generation to become familiar with business operations and decision-making.
Another method is to recapitalize a closely held corporation to create different classes of stock, specifically non-voting common stock. This allows the senior family member to transfer the economic benefits of the business — such as dividends and asset appreciation — to the next generation, while retaining all voting rights in the management of the company. As with family limited partnerships and LLCs, the stock recipients receive profits and are provided a training ground for learning the business.
An important component of succession planning is the establishment of a buy/sell agreement: a binding document that controls what happens to a business owner’s share of the company upon their death, disability or retirement. It gives the business or the remaining owners the right or obligation to buy out the deceased owner’s share at a predetermined price. It can work in connection with a life insurance policy to finance the purchase of the owner’s interest. A buy/sell agreement not only provides certainty and stability but also prevents potential conflicts among surviving owners or family members.
An estate planning lawyer with experience in business succession planning can provide valuable guidance on the use of these techniques to achieve optimal results. A skilled attorney can ensure that all planning is done with an eye toward tax implications, legal compliance and alignment with your overall goals. This includes preparing wills, trusts and other essential documents.
Jeffrey P. Hall, PLLC, with offices in Phoenix, Peoria, and Chandler, assists people across Arizona with achieving their estate planning objectives. To schedule your free initial consultation, call me at 480-409-5174 or contact me online.
