Sunday, 16 June 2024

Estate planning: Business succession planning for closely held and family businesses

Closely held and family run businesses are vital to our economy, our society and integral to the American dream itself.


Planning for transitions in ownership and control is necessary to ensure retirement income to the owner; liquidity to the owner’s estate upon death; preservation of the business as a “going concerns”; and estate tax minimization, as relevant.


If you are a business owner, such planning entails asking yourself the following: (1) How will your business continue without you – will you keep the business in your family or sell it, and if so, to whom; (2) if some children will participate in the business and others not how will your estate plan accommodate that; (3) Are there key employees you need to retain; (4) Does your business need reorganization; (5) Do you have a “buy sell” agreement in place (presuming multiple owners); and (6) How will the “buy sell” agreement be funded. Now, let’s examine each area.


At the outset, examine your business and family goals, and identify limitations placed on such goals by business agreements with co-owners; determine who will be your successor(s). If you plan to sell to outsiders, ask yourself what do you need to get the business ready for sale, and how will you find potential buyers? Presuming family participation, who has the interest and necessary aptitude? Do you need the consent of the other partners? Will their plans and your plans coincide nicely? Will a sale to them provide you with an adequate retirement? Will you continue as a consultant or employee to assist them and to earn retirement income?


Next, how will your estate plan provide for your other children not in the business? Does being fair to them mean treating them equally or unequally? Are there other assets (like insurance) to give them? Do you wish to give them an economic ownership interest only? If so, should the active family be allowed to buy-out the inactive family?


What about your key employees, will they be retained after you leave? Will your family accept them, and vice versa? Should they have an ownership stake? If so, will they be allowed to buy-in, or will they receive their interests as conditional employee bonuses (sweat equity) subject to forfeiture? Furthermore, will they participate in management?


Does your business need reorganization in order to transfer or retain control and/or ownership interests as desired? Sole proprietorships are often converted into LLC’s, corporations or partnerships. For example, with an LLC you can retain control as the general partner but allow your children ownership as limited partners.


Alternatively, you may want to give control but retain an economic interest for your retirement. For example, with a corporation you can retain preferred stock and transfer common stock, and so require that dividends be paid to you first.


A “buy sell” agreement is needed when you have co-owners in order to allow your interest to be purchased upon certain triggering events: disability, retirement, and death. The agreement sets the a price, often by formula or appraisal. Also, it may allow the business itself, or your remaining co-owners, a right of first refusal to purchase your interest.


Above all, how will you fund the plan? Usually the business or its owners purchase life insurance, and sometimes disability insurance, on each owner. Alternatively, an installment sale to the business, its remaining owners, or outsiders may be used. Installment sales, however, may present a cash flow problem to your estate when it needs money in order to support your family, to pay immediate administration costs, and to pay taxes.


Lastly, succession planning is a multi-disciplinary endeavor involving business planning, estate planning, financial planning, income tax and estate tax planning, and perhaps business counseling. Typically, a team consisting of an attorney, accountant, and a financial planner is needed to advise and assist you.


Dennis A. Fordham is an attorney licensed to practice law in California and New York. He earned his bachelor's degree at Columbia University, his juris doctor at the State University of New York at Buffalo, and his LL.M in taxation at New York University. He concentrates his practice in the areas of estate planning and aspects of elder law. His office is at 55 First St., Lakeport. He can be reached by e-mail at dennis@dennisfordhamlaw , com or by phone at 707-263-3235.

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