What Is a Succession Plan for a Family-Owned Business?
The most popular options used by family and small business owners to transfer ownership to their successors include stock gifting, personal buyouts, stock redemption and the use of grantor-retained annuity trusts. These are discussed in a recent article from Insurance Journal, “Perpetuation Planning—Part Two.” A prior article in the series examined reasons for a succession plan and options for internal owner transferring.
Gifting stock and assets. Any person may gift up to $19,000 to any number of recipients without incurring federal gift taxes. If a married couple makes gifts together, they can gift up to $38,000 to as many people as they wish. In 2025, the maximum for a one-time gift is $13.99 million per person or $27.98 million for couples.
Personal buyout. In a personal buyout, an employee purchases stock shares from the retiring shareholder. There are numerous ways to fund the buyout, including using personal funds or paying through a current salary. In some cases, the company can fund the buyout by using an enabling bonus. This is used to help employees who would otherwise be unable to purchase a large block of stock. It can also be used as a performance incentive. There are some details to note: the bonus received is taxable, and the taxes on the buyers and sellers of stock erase the tax benefits from a corporate tax deduction. For some companies, the enabling bonus is increased to help with tax payments.
Succession through stock redemption. Another means of transferring wealth to new owners is for the corporation to buy outstanding shares of common stock and retire them to treasury stock. The detail: the payment of the stock must come from after-tax dollars. On the plus side, interest associated with a stock redemption can be tax-deductible. The simplicity of this method makes it attractive, despite the taxes.
Using a grantor retained annuity trust (GRAT). A GRAT is an irrevocable trust where the donor transfers property into the trust and receives annual payments from the trust for a term set by the donor. A taxable gift is made of the present value of the remainder interest at the end of the fixed term. If the grantor lives past the fixed term, the entire value of the trust escapes any estate tax. The value of the stock is frozen until it passes to the beneficiaries.
The value of the grantor’s annuity interest is subtracted from the value of the trust to determine the taxable gift. A GRAT can be used to remove a large amount from the grantor’s estate, transferring property to a trust beneficiary at a reduced transfer tax.
Leveraged Employee Stock Ownership Plan. An ESOP is a defined-contribution benefit designed to invest in the employer’s stock to transfer ownership of the company to employees. This allows the owner to diversify a portion of the business equity without triggering a taxable event and without selling a controlling interest. Valuable key employees are more likely to remain, and the ESOP creates a plan for the eventual sale of the rest of the stock without paying income tax on the gain from such a sale. ESOPs can be expensive, require an annual valuation of the ESOP shares, and may incur expenses that outweigh the tax benefits, making them not suitable for every business.
Any succession plan requires time and knowledge. If the business owner relies on the company’s cash flow to cover their living expenses during retirement, for instance, different means may be needed than those described above. Estate planning professionals and tax advisors should be involved with a succession plan to ensure that the owner receives the value of their hard work and the business continues to the next generation.
Reference: Insurance Journal (May 19, 2025) “Perpetuation Planning-Part Two”
