Business Succession Planning

For most family business owners, the business represents the most valuable, and often the most illiquid, asset in the owner’s estate. Accordingly, business succession planning is planning for the orderly transfer of the management and ownership of a business to new managers and new owners in a way that will avoid the forced (or untimely) liquidation of the business and/or payment of excessive estate taxes and other expenses, while at the same time accomplishing the family’s nontax objectives.

Without proper planning, the business may have to be sold to meet the liquidity needs of the family.

Sometimes the ownership of the business and the management of the business go to different people. For example, management may go to non-family members or ownership may be transferred to non-family members. Other times, ownership and management of the business remains within the family.

Whether the family business remains with the family or not, there are often significant estate tax and income tax considerations which impact how the succession plan is to be designed.

Business succession planning requires the application of different areas of the law and often times requires creativity and flexibility. The adviser needs to understand the company’s financial situation, as well as being aware and cognizant of particular family dynamics. It is critical that the adviser also have extensive knowledge of the tax and nontax law, including corporate, partnership, and limited liability company (LLC) law, as well as knowledge of the estate planning and administration issues.

When designing a business succession plan, we will address the various issues which confront most closely held family businesses:

  • Should the business be sold during the owner’s lifetime?
  • Should the business be continued after the owner’s death?
  • Will family members or “outsiders” control the business after the owner’s death?
  • Will family members will own the business after the owner’s death?
  • Who will manage the business after the owner retires or dies?
  • Will the owner’s children be treated equally in the distribution of the owner’s estate?

Business succession planning is a dynamic process and will address a variety of concerns. It must be integrated with the owner’s overall estate plan and perhaps be coordinated with the owner’s insurance needs as well as charitable goals. Since continuity of management is vital in the success of any business, key employees need to be retained and rewarded with retirement plans and other types of employee benefits. The general workforce must also be addressed as they are the backbone of any small business.

Careful planning involving the entire family at an early stage, followed by implementation and follow-up, will significantly increase the chances for the successful transition of the business to the next generation.


Transferring Business Interests to Family Members: Sale of Non-Voting Stock Interests to Grantor Dynasty Trusts