Private Client Services Update – Family Business Succession Planning (Beyond Taxes and Trusts)

    By Alison V. Lennarz, Estate, Trust & Wealth Transfer

    Successful business owners have many excuses to postpone hard discussions about what will happen to their business following their death. Many wait to address this inevitability until terminal illness or imminent death leaves no alternative. To minimize friction between family members and risk to the business, and to maximize opportunities, business owners should undertake business succession planning while they are still healthy and in control.

    A threshold question is whether the business will be liquidated, sold, or continued by the family at the owner’s death. Liquidation, which usually results in a loss of value, may be the only option if inadequate planning leaves the business unable to meet its obligations or the owner’s estate saddled with taxes or other debts. Sale of a business as a going concern often generates more money for the owner’s beneficiaries, but still risks a decline in value due to the loss of the business’ primary leader. An owner may direct the sale of the business if the family lacks necessary expertise or has no interest in continuing the business. Often, however, the owner wishes to pass ownership and control of the business to one or more family members.

    Successfully transitioning a business to family members requires careful preparation and communication. First, the business owner must ready the family by introducing the succession issues and articulating a clear vision, including the broad ownership, governance, and management goals of the business. These, in turn, will generate the organizational structures which connect the family with its assets and values and which balance the family’s economic and non-economic goals.

    Succession and estate plans cannot be made independently of one another. In addition to addressing transition matters, an effective plan should include lifetime strategies to reduce estate and gift taxes, such as annual and lifetime gifting, creation of grantor retained annuity trusts, installment sales to intentionally defective trusts, and similar tactics. But a business succession plan is much more than the transactions necessary to transition ownership and minimize taxes. Without a plan that addresses family issues, neither the family nor the business will thrive.

    For example, ownership and management of the firm may not always transfer to family members equally. If a business owner’s children make unequal contributions to the business but share ownership and management rights equally, problems resulting from resentment among siblings or spouses are likely to impact the business. A successor might not be able to afford the outright purchase of ownership interests, so the plan may include financing arrangements as well as a clearly defined role and responsibilities for the owner and successors. The succession plan should realistically acknowledge and address the family dynamics, passing the business to family members willing and competent to run it and providing for non-business assets to pass to other family members to balance the distribution scheme where possible.

    Alternatively, the plan may call for a capital structure with preferred and common or voting and non-voting stock, or an operating agreement that separates management powers from ownership. Such structures may also segregate investment assets of a business (such as real estate or intellectual property) from the operating assets of the business, to accomplish estate planning, tax and creditor protection goals. In all events, preservation of family harmony depends upon achieving fairness, based on the particular facts, in planning the transfer of business and non-business assets. A team of outside professionals can provide critical objectivity, problem-solving experience, and financial and legal expertise necessary to value the business and draft operating or buy-sell agreements, trust instruments and other necessary documents.

    Alison V. Lennarz is of counsel at Kaufman & Canoles in the firm’s Williamsburg office. Her practice includes estate planning and estate administration, forming and counseling small businesses and non-profits, as well as representing purchasers and sellers in commercial and real estate transactions. She can be reached at (757) 259.3830 or

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.