You are here: Practice Areas Estate Planning Business Succession

Business Succession

Business Succession Counsel at MacCormack Law

Long term planning involves developing your ultimate exit strategy from your business.  An early start allows for more flexibility and the time to evaluate alternatives.  Business owners should understand what will happen to their business if they die or become disabled.  Do they have an estate plan that provides for the transfer of their stock? Do they plan to sell the business or transfer it to a child?  Are there any tax implications when transferring stock to a child? 

There are a wide variety of business succession techniques that are available to help you accomplish your planning objectives.  This may include the use of buy-sell agreements, family limited partnerships, recapitalization of corporate stock, gifting, and testamentary transfers to trusts.   We will work with you and your advisors to implement various strategies to minimize the impact of estate, gift, and income taxes.   

Buy-Sell

Buy-Sell Agreements

What will happen to your business entity if one of the owners becomes disabled, dies, desires to sell to a third party non-owner, retires, becomes divorced or bankrupt, or changes employment?
A properly drafted Buy-Sell Agreement will address these scenarios and accomplish important goals by:

  • Providing that upon the occurrence of a specified “triggering event,” owners are guaranteed that their interest in the business will be purchased;
  • Providing that the owner’s interest must be sold to the company, or the remaining owners;
  • Ensure the continuity of ownership and management of the business entity;
  • Provides for an agreed upon valuation method that will eliminate conflict, disagreement and possible litigation between the parties;
  • Providing a funding source, primarily through insurance policies, without compromising the liquidity needs of the business; and
  • Establishing a valuation of a deceased owner’s interest in the business for estate tax purposes.

Family Partnership

Family Limited Partnershp

Family limited partnerships remain a popular entity for protecting assets from creditors, reducing estate taxes, and transferring ownership in closely held businesses to children and grandchildren.  The typical family business would be structured so that the children set up an LLC to serve as the general partner (1% owner).  The parents living trust would serve as the 99% limited partner.  To fund a partnership, you would transfer assets to the partnership in exchange for general and limited partnership interests.  So after the funding, the partners will own partnership interests rather than the underlying asset that was transferred. 

The limited partnership units are typically transferred to children, or to a trust for their benefit. By using a trust instead of direct gifts to children, claims against the limited partnership interests by the child’s creditors and spouses are avoided.  Case law supports the conclusion that a gift of limited partnership interests are valued substantially less than just an outright transfer of partnership assets. This would enable you to transfer assets to your children at a reduced value for gift tax reasons, which may result in significant estate tax savings. 

Proper utilization of a family limited partnership can reduce the owner's taxable estate, fully utilize and compound the gift and estate tax credits and exemptions available to the owner, spread income among children and grandchildren in lower marginal income tax brackets, remove a substantial amount offuture appreciation from the owner's estate, and place assets beyond the reach of creditors.

Recapitalization

Recapitalization

The recapitalization of a family business that is a Subchapter "S" corporation can be used to achieve the same result and benefit of a family limited partnership.  Recapitalization of a Subchapter "S" corporation typically involves the issuing of voting and nonvoting common stock. The owner maintains control and managementof the company by retaining the voting stock while transferring the nonvoting stock to the successors.  Recapitalization can also be utilized when a family business is a "C" corporation.

Gifting

Gifting

Current law allows an annual gift tax exclusion of $13,000 per recipient per calendar year. The spouse of an owner can also consent to the gift and allow the owner to utilize the annual gift tax exclusion of the non-owner spouse. Accordingly, under current law an owner can gift ownership interests in the company having a value as of the date of the gift of $26,000 per recipient each calendar year with no gift tax consequences and without being required to file a gift tax return (Form 709).

If you gift limited partnership units or non-voting common stock, the value of the gift can be discounted for gift tax purposes resulting in a larger number of shares or units being gifted.  Gifting can also reduce or eliminate estate taxes and permits the owner to plan and implement a succession and change in ownership plan.  This will allow family members to attain meaningful roles in the company with the owner still retaining control and management.

Testamentary Transfers

Testamentary Transfers

The most common method of testamentary transfers is through the establishment by the company owner of a revocable living trust during the owner's lifetime. One of the primary reasons to establish a revocable living trust is to avoid the expense and delay of probate of the owner's estate. This trust can also be utilized for company succession purposes.

The terms of the trust can pass the right to ownership of the company to one or more beneficiaries.  An outright bequest passes the company interests to the family member involved in the business as part of its inheritance. Then non-company assets typically would pass to other family members who are not involved in the company. This allows for a smooth succession of the company to the family member involved in the company and promotes harmony in the surviving family members as monetarily they are treated the same.