Family business succession requires advanced planning

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Planning for the succession of the family business is a challenging task for bus-iness owners and their advisers.|ret||ret||tab|

Most succession plans are built on the foundation of the traditional estate planning techniques consisting of wills, trusts, powers of attorney, health-care di-rectives and, where appropriate, lifetime gifts. But this is only the starting point of implementing a successful succession plan. |ret||ret||tab|

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Goals|ret||ret||tab|

The business adviser must identify and understand the underlying goals of the bus-iness owner.|ret||ret||tab|

Although every bus-iness owner wants to run a profitable business and minimize taxes, other goals such as the following are often more important:|ret||ret||tab|

Financial security during the lives of the business owner and his or her spouse is the immediate concern of most owners. Long-term financial security be-comes an even bigger responsibility for the owner when many family members derive their livelihoods from the family business.|ret||ret||tab|

The family business is often viewed as a legacy that will provide the children with financial freedom and the ability to control their own financial futures. It is the means to perpetuate the family heritage and build a common family tradition.|ret||ret||tab|

Family harmony is another common goal in spite of the fact that clashes over business problems sometimes can de-stroy close family relationships. |ret||ret||tab|

Research indicates that 60 percent of succession failures are due to breakdowns in family relationships while only 10 percent are attributable to tax and estate planning issues.|ret||ret||tab|

Whether the business will be sold to outsiders or survive the owner's death will of course depend on many factors. Chief among these will be whether a successor has been trained and given the opportunity to exercise judgment, make decisions and share leadership with the owner.|ret||ret||tab|

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Estate taxes & lifetime transfers|ret||ret||tab|

Estate taxes will remain with us until the year 2010. Even though the exemptions are increasing between now and then, many estate and business succession plans continue to be driven by this issue. |ret||ret||tab|

For that reason, it is important to recognize that lifetime transfers of family business interests from one generation to the next is the most effective way to minimize transfer taxes. Before any transfers are made however, the business must first be valued. Fortunately for taxpayers, once the underlying asset value of the business has been determined, gifts of non-controlling interests can be discounted.|ret||ret||tab|

The two most common discounts are the minority interest discount (addressing lack of control) and the discount for lack of marketability (reflecting the lack of a ready market for closely held stock). The Internal Revenue Service now ap-pears willing to accept a combined minority and lack of marketability discount of 35 percent. |ret||ret||tab|

Once the discounted value is determined, an owner may then exclude from gift tax consideration up to $10,000 of gifts made per beneficiary, per year. Married persons together can give up to $20,000 per year, per beneficiary free of gift tax.|ret||ret||tab|

Not all owners of family businesses are willing or able to make gifts of their interests. In some families, only certain children have been identified to receive equity interests in the business. In this situation, an intra-family sale to children active in the business may make the most sense. A properly structured sale can serve to equalize the estates for the other children and keep future appreciation out of the owner's estate for estate tax purposes.|ret||ret||tab|

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Buy/sell agreements & insurance|ret||ret||tab|

Whether or not a gifting program or intra-family sale is implemented, no business succession plan should be without a buy/sell agreement. This is an agreement among business owners and the business entity itself that restricts transfers to outsiders and sets a price for the sale and purchase of the business interests upon the occurrence of future events, such as death, disability or retirement.|ret||ret||tab|

Life insurance also has a number of important uses in a family business. It can help fund a buyout under the buy/sell agreement and provide the liquidity for death taxes and payment to family members who do not succeed to ownership. Careful planning is required, however, to avoid further income or estate tax problems.|ret||ret||tab|

The biggest hurdle may be the owner's reluctance to plan at all. If, as business advisers, we can be more than just technicians and try to understand the owner's unique business and family situation, maybe that reluctance can be overcome.|ret||ret||tab|

(J. David Croessmann is an attorney and shareholder of Yates, Mauck, Bohrer, Elliff, Croessmann & Wieland PC. He concentrates his practice in the areas of business, tax and estate planning).[[In-content Ad]]