The Gray Areas of Estate Planning for a Family Business

Posting by Joel C. Susco, CPA

Estate planning is a daunting task for most anyone, but estate planning if you are a family business owner is usually twice as difficult. So much must be considered: the estate plan needs to address the equitable division of assets among the heirs while minimizing the impact of estate, gift and income taxes, not to mention the succession of business leadership, coupled with the conflicting goals of inheriting family members. This process is further complicated by emotional and psychological impacts of personal relationships and the perceived message that financial favor communicates regarding parental love, approval and acceptance.

Tax and probate law are precise and well-defined disciplines. Likewise, the mathematics of projecting estate tax liabilities and planning for the cash flow needs of a business are relatively exact sciences. Balancing the practical needs of business and estate administration with family harmony, however, is largely an art.

Most family business owners would rate family harmony as far more important than their assets. Many owners also have confidence that the strength of their family ties will ultimately overcome any conflict arising from the administration of their estate. However, relying on the strength of your family ties often sadly underestimates the strain financial matters can place on relationships.

Estate Planning & Family Business Succession

By acknowledging the emotional impact of inheritance and taking the steps to planning appropriately, you can leave both active and non-active heirs satisfied with their share and minimize the possibility for rivalries. Keep in mind the following principles as you consider your estate plan:

Plan early – and often. The transfer of wealth from one generation to the next is such a huge factor in a closely-held business’s ongoing viability that succession and the relevant estate tax issues should be an integral part of your strategic plan. Planning for the transfer of your business should begin as soon as there is a business to transfer. Once the plan is in place it is crucial that it be revisited to reflect changes in the business, as well as changes in family circumstances and in estate, income tax and probate law.

Communicate openly. Many business owners avoid discussing inheritance with their children out of fear that it will negatively affect the child’s work ethic. On the contrary, if done properly, open and frank discussions can prepare your heirs for the responsibility of inheritance, and manage their expectations regarding the future.

With open communication, you have an opportunity to explain your goals for your business and the motivations behind your decisions. If hard feelings arise, the smart step is to address the issues directly. If necessary, seek out trusted advisors or other objective parties to help frame the discussions and settle controversies.

Don’t wait until it’s too late. As life expectancies grow longer, it is more common for children not to receive their inheritance until they are in their later years. Lifetime gifting, particularly gifts made at crucial milestone moments, can have a profound effect on a family’s financial and personal life.

Likewise, transfer of ownership in a family business, whether through sales, gifts or equity compensation rewards sweat equity in a timely fashion and can help ensure a smooth transition of management to the next generation.

Be creative. Every family and every business has its own special set of needs. Cookie-cutter wills and trusts are a recipe for disaster. Having clear goals for the administration of your business and estate is crucial. There are many different ways to provide fairness to each heir.

There are so many positive reasons that family businesses are started and nurtured in the first place. Why not invest the same level of time and thought into estate planning, to carry the legacy of both the family and the business far into the future? Your family, and your business, will be well-served by this endeavor.

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