Estate Planning for the Family Business

By Suzanne M. Rehmani, Esq.

A small business owner’s interest in their business is usually their largest asset.  Yet, most business owners neglect OWNERSHIP TRANSITION of their business to the next generation when planning their estate!  Unfortunately, so many of us get caught up in the day-to-day operations of our family business, that we forget to look toward the future, weeks, months and years ahead, to determine where the family business we worked so hard to build will be once we are gone.  Will it continue on after our death?  Will we be able to maximize our return on the business we have spent our life building by selling our interest at a profit so that we can retire and have the business run by the next generation?  Business succession planning says a lot about who you are, your goals, your optimism in the future and your investment in the future for the owners, the business, the employees and the customers of the business.    Successful business succession planning is imperative and should include the following.

• Reviewing the business ownership structure - businesses may operate as sole proprietorships, partnerships, limited liability companies, limited liability partnerships, business trusts, C corporations, and S corporations.  Each form has unique tax and asset protection issues.  It may be necessary to change the business entity form of the business to achieve certain business succession goals.  The company accountant should be consulted;

• Analysis of the needs and desires of the current owners; perhaps a key, long-term employee is better suited to continue running of the company rather than a family member; maybe one family member is intimately involved in the operations and other family members want to have nothing to do with the company yet even distribution of estate assets among family members is important to the parent who started the company.

In addressing these steps, is it imperative that the company accountant be involved and is one who can provide input as to business valuation issues and projections.  Moreover, insurance products are often utilized in implementing a succession plan.  Life insurance proceeds may be one of the best avenues to assure a smooth transition, if structured properly.  For instance, life insurance can fund the implementation of a buy-sell agreement; provide for the survivors of a deceased employee; provide alternative inheritance resources for persons or family members not involved with the business; and reduce the impact of the loss of a key employee.   The primary disadvantages of life insurance are, firstly, a person with health problems may not be able to purchase insurance at all or the purchase may be at such a significantly increased premium that it is prohibitive.  Secondly, cash flow issues may affect the ability of the business to fund the cost of the insurance.

Possible vehicles will include various techniques for transferring business ownership. Some of these vehicles include Buy/Sell Agreements funded with life insurance, annuities or other funding avenues; loans or notes from banks to purchase stock from selling shareholder/business owner; notes or loans from selling shareholder/business owner that extend payments over a number of years; selling to employees; selling business to an outsider; structured gifting of stock to family member who will take over business. It is important to remember that any transfer must be formulated with the individual owner’s overall estate plan in mind.

The consequences of failing to plan your estate and business succession properly can be devastating. It is interesting to note that only 34% of successful family businesses survive to the second generation and even fewer, 13%, survive to the third generation while Federal estate taxes go as high as 55 percent.  In today’s uncertain and turbulent economic climate proper planning can be critical and too important to ignore and put off until tomorrow.

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Suzanne M. Rehmani is an attorney in the Business and Estate Planning/Probate Department of the law firm of Kring & Chung, LLP. For more information or with questions regarding real estate law, please contact Ms. Rehmani at (949) 261-7700 or via email at srehmani@kringandchung.com

** The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change with time. Applicability of these same legal principles may differ substantially in individual situations. Please consult an attorney before making a decision in a particular area using only the information provided in this article.