Does Your Family Business’s Succession Plan Include Estate Planning Strategies?

By: Layne Blasingim, CPA

Family-owned businesses (both large and small) face distinctive challenges when it comes to succession planning. For example, it’s important to address the distinction between ownership succession and management succession.

When a nonfamily business is sold to a third party, ownership and management succession typically happen simultaneously. However, in the context of a family business, there may be reasons to separate the two.

Retaining control

From an estate planning perspective, transferring ownership of assets to the younger family members as early as possible allows you to remove future appreciation from your estate, thereby minimizing estate taxes. Proactive estate planning may be especially relevant today, given changes to the federal estate and gift tax regime under the Tax Cuts and Jobs Act.

For 2023, the unified federal estate and gift tax exemption will be $12.92 million, or effectively $25.84 million for married couples. In 2026, the exemption is set to fall to about $6 million, or $12 million for married couples, after inflation adjustments — unless Congress acts to change the law.

However, when it comes to transferring ownership of a family business, older generations may not be ready to hand over the reins — or they may feel that their children aren’t yet ready to take over. Another reason to separate ownership and management succession is to provide for family members who aren’t involved in the company’s day to day operations, but who you think should still be able to claim some of the income of the business. Providing heirs outside the business with equity interests that don’t confer control may be an effective way to share wealth within the family.

Possible solutions

Several tools may allow you to transfer family business interests without immediately giving up control, including:

  • Trusts,
  • Family limited partnerships,
  • Nonvoting stock, and
  • Employee stock ownership plans (ESOPs).

Owners of smaller family businesses may perceive ESOPs as a complex tool, reserved primarily for large companies. However, an ESOP can be an effective way to transfer stock to family members who work in the company and other employees, while allowing the owners to cash out some of their equity in the business.

Owners can use this liquidity to fund their retirements, diversify their portfolios or provide for family members who aren’t involved in the business. If an ESOP is structured properly, an owner can maintain control over the business for an extended period even if the ESOP acquires a majority of the company’s stock.

Conflicting needs

When it comes to succession planning, older and younger generations of a family business may have conflicting objectives and financial needs. So taking all these factors into consideration when planning is important.

If you have any questions you would like to have answered about this topic, please reach out to Elaine Dougherty, CPA in our Morgantown office at 304-554-3371.  You may also email Elaine at edougherty@suttlecpas.com.