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Blogging from Heckerling: Post Four

Business Succession: Abdicate? Affiliate? Alienate? Bifurcate? Syndicate? Liquidate? Vacillate? Don’t Wait. Cogitate and Participate

Thomas W. Abendroth (Schiff Hardin LLP) spoke about the challenges inherent in business succession planning for privately owned businesses.  The key components are appreciation and time.

Although the usual array of estate planning techniques may be used, Mr. Abendroth discussed the challenges that arise during the selection and implementation for the future transfer or sale in a cost- and tax-efficient manner that will allow the family and business to continue successfully after the transfer.  His discussion highlighted certain key elements for a successful plan, which are flexibility, bifurcation, diversification, transfer tax savings and non-tax factors.

One of the big issues for family owned businesses is control.  Many business owners want family members to participate in the ownership but not the control of the business.  One way to accomplish this is by creating voting and nonvoting shares.  An owner who will not relinquish absolute control can use nonvoting stock to give away equity in the company without reducing his or her control.  Alternatively, the owner may want to give voting shares to the child who is active in the business and the nonvoting shares to the other children.

Mr. Abendroth stressed that planning for the successful transfer of wealth created in a business cannot start too early.  A new business venture may provide one of the best opportunities to remove future value from a person’s estate. 

Traditional planning for transfers of wealth usually maximize discounts and minimize premiums on valuations.  With the increased gift and estate tax exemption now at $11 million, the gain may well be in the basis step up rather than the valuation discounts.
A significant nontax issue is the family dynamics which may not be known at the time of planning especially when younger family members are involved. One may need to consider that when dealing with young family members, the possibility that non-descendants (spouses of family members, in particular) may acquire rights to the stock through divorce, community property laws or the death of the descendant. It is sometimes difficult to convince young couples of the importance of having a prenuptial agreement.  One possible solution is to suggest that the agreement be limited to the shares of the business and have the limitations to the heritage of family ownership.

Any succession planning should be reinforced by a buy-sell agreement among the shareholders and the company as it will provide the ultimate protection for the company itself, by providing the company or other family shareholders with the ability to purchase stock from an undesirable shareholder.

Business succession planning is an important matter and one that should not be overlooked or left until a sales contract is already signed.


 Blogging from Heckerling 2018

Patricia Green is a Tax Director with over 30 years of experience in providing services to small businesses, individuals and estates. She has expertise in tax compliance, estate and gift tax, wealth transfer, and succession planning.

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