Every established company will encounter challenges when confronting the thorny issue of succession planning. Family-owned businesses, however, often face particularly complex issues. After all, their owners may have to consider both family members who work for the company and those who do not.
If yours is a family business, you may run into some confounding riddles as you develop your succession plan. As difficult as it may seem, always bear in mind that there are solutions to be found.
Divergent financial needs
One tough quandary for many family businesses dealing with succession planning is that the financial needs of older and younger generations conflict. For instance, the business owner is counting on the sale of the company to serve as a de facto retirement fund while the owner’s family wants to take over the business without a significant investment.
Fortunately, several strategies are available to generate cash flow for the owner while minimizing the burden on the next generation. For example, an installment sale of the business to children or other family members can provide liquidity for owners while easing the burden on children and grandchildren. An installment sale may also increase the chance that cash flows from the business can fund the purchase. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.
Trust alternatives
Alternatively, owners may transfer business interests to a grantor retained annuity trust (GRAT) to obtain a variety of gift and estate tax benefits, provided they survive the trust term. They’ll also enjoy a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s beneficiaries. GRATs are typically designed to be gift-tax-free.
Similarly, a properly structured installment sale to an intentionally defective grantor trust (IDGT) allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes.
The answers are out there
There’s no doubt that every family business is a little bit different. Nevertheless, there are probably answers out there to your distinctive questions. We can help you put together a succession plan that’s right for you and your family.
DISCLAIMER:
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.
