No one can control their business from the great beyond, but with good planning and communication, the chances of the family business continuing are greatly improved.
Estate planning for the owner of a family business is more complex and requires more thought than estate planning for an employee who owns a home and investment accounts. In "Five things you should know about estate planning for a family-owned business," Smart Business points out, in five broad strokes, key aspects that need to be considered when making an estate plan for the business owner that include protecting the business and family members.
Identify and prepare your successors. Smaller businesses may need someone to oversee a sale or liquidation. Communication with and buy-in by your team is critical. The group should have a clear understanding of your goals, what's intended and how to achieve it, way before the time comes.
Look at your liquidity needs. Business owners are often highly illiquid because of business value compared to other assets. Liquidity in your estate is important to provide for your family and replace your earnings. If estate tax is owed, your estate will need liquidity to pay those taxes or else face a forced sale of the business. Life insurance may be a good solution, with the structuring of life insurance policies through irrevocable trusts. The business itself could have a policy on you to help pay down debt, provide working capital, or replace your on-going contributions.
Structure company ownership to separate control from value. If you own a controlling interest in the company, issuing voting and non-voting stock (or managing and non-managing interests in a partnership or LLC) gives a lot of flexibility for your estate. One person or group can run the business and legally control it by owning the voting stock, and another group still can receive the economic benefits of ownership through non-voting stock without being involved in business operations. Having a trust to own both voting and non-voting stock is frequently better than outright ownership.
Reduce your estate tax liability. Federal estate tax of 40% applies to estates over $5.45 million and $10.9 million for married couples. Consider decreasing that liability with some wealth-transfer planning. An owner of a profitable, cash-flowing business could transfer wealth out of the owner's taxable estate and into trusts for family at little to no gift tax costs through installment sales of stock to irrevocable "defective" grantor trusts (IDGTs) and funding grantor retained annuity trusts (GRATs.). These reduce the need to purchase life insurance or set aside liquid assets in your estate to pay the tax. Talk with a qualified estate planning attorney to properly implement them.
An estate planning attorney with experience helping family business owners as they plan for the future is a valuable part of your family's business team. Developing a plan and checking it on a regular basis to ensure that it remains relevant will give you peace of mind of knowing that you have prepared for the future and protected your family.
Reference: Smart Business (March 18, 2016) "Five things you should know about estate planning for a family-owned business"
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