Estate Planning Blog Articles

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What Is Family Business Succession Planning?

Many family-owned businesses have had to scramble to maintain ownership, when owners or heirs were struck by COVID-19. Lacking a succession plan may have led to disastrous results, or at best, less than optimal corporate structures and large tax bills. This difficult lesson is a wake-up call, says the article “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’” from Bloomberg Tax.

Another factor putting family-owned businesses at risk is divorce. Contemplating the best way to transfer ownership to the next generation requires a candid examination of family dynamics and acknowledgment of outsiders (i.e., in-laws) and the possibility of divorce.

Before documents can be created, a number of issues need to be discussed:

Transfer timing. When will the ownership of the business transfer to the next generation? There are some who use life-events as prompts: births, marriages and/or the death of the owners.

How will the transfer take place? Corporate structures and estate planning tools provide many options limited only by the tax liabilities and wishes of the family. Be wary, since each decision for the structure may have unintended consequences. Short and long-term strategic planning is needed.

To whom will the business be transferred? Who will receive an ownership interest and what will be the rights of ownership? Will there be different levels of ownership, and will those levels depend upon the level of activity in the business? Will percentages be used, or shares, or another form?

In drafting a succession plan, it is wise to assume that the future owners will either marry or divorce—perhaps multiple times. The succession plan should address these issues to prevent an ex-spouse from becoming a shareholder, whose interest in the business needs to be bought out.

The operating agreement/partnership agreement should require all future owners to enter into a prenuptial agreement before marriage specifically excluding their interest in the family business from being distributed, valued, or deemed marital property subject to distribution, if there is a divorce.

An owner may even exact a penalty for a subsequent owner who fails to enter into a prenup prior to a marriage. The same corporate document should specifically bar an owner’s spouse from receiving an ownership interest under any circumstance.

A prenup is intended to remove the future value of the owner’s interest from the marital asset pool. This typically requires the owner to buy-out the future spouse’s legal claim to future value. This could be a costly issue, since the value of the future ownership interest cannot be predicted at the time of the marriage.

Many different strategies can be used to develop a succession plan that ideally works alongside the business owner’s estate plan. These are used to ensure that the business remains in the family and the family interests are protected.

Reference: Bloomberg Tax (April 5,2021) “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’”

secure farm or ranch

Securing Farm or Ranch Needs to Happen Sooner and Not Later

Most American farms or ranches are family businesses, started by one generation with the hope that the business will be transferred to the next generation. However, surveys show that only 20% of farm and ranch owners are confident they have a good plan in place for the transition, reports High Plains Journal in the article “Don’t wait to secure the future of your farm or ranch.” A common reason is that owners just aren’t ready, or they don’t have the time, or the right advice. They could also be put off by the complexity of the process.

Transition planning is possible. There are solutions for every farm, ranch or business, whether the goal is to ensure that your legacy continues, minimize taxes or provide for heirs who are and who are not involved with the business.

Understand that the process can take at least a year. A good estate planning attorney who is familiar with family businesses like yours will be an important help. The process will include both estate and succession planning. Here are some basic steps to help:

Reaching consensus. You’ll need to have discussions to clarify what the senior generation wants, and what their heirs want. Discuss how management and task-focused work is currently divided and who is going to step to up take what tasks.

Developing a plan. How will the operation go forward, and how will assets be distributed? What kind of coaching will be needed to ensure that the next generation has the tools and knowledge to succeed?

Estate planning is the paper and financial part of the process that will provide ways for the operation to mitigate estate taxes and prepare for wealth and asset management.

The succession plan involves the “people” side of the business, including developing vital business management and leadership skills, passing down the values of the founding owners and providing clarity for the family throughout this process.

Implementing the plan. This will be different for every scenario, but might include:

  • Splitting the operation into two entities: one that will operate ranch operations, another that will own the land.
  • Stipulating the owners with two types of ownership: voting and non-voting.
  • Voting ownership—deciding if it is to be retained individually or controlled by a trust.
  • Should non-voting ownership be transferred to trusts to reduce estate taxes?
  • Transfer strategies must be evaluated: gift, sale or stock options.

Here’s the most important concept: start now. Waiting to talk with an estate planning attorney could leave heirs in a situation where they can’t continue the family legacy. A failure to plan could mean they are forced to sell the land that’s been in the family for generations.

Reference: High Plains Journal (Aug. 14, 2020) “Don’t wait to secure the future of your farm or ranch”

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