We understand the delicate balance between family and business concerns inherent in a family business. Our business succession planning team works closely with family owners and non-family executives to address both the business and non-business needs of family business owners.
The Three Transitions
All business owners face the problem of the three transitions:
- Management continuity
- Ownership retention/disposition
- Net worth adjustments to address estate tax liquidity needs
A management succession plan is crucial to a business’ ongoing prosperity. Our team is frequently asked to provide advice on transitioning management responsibilities to family members and nonfamily professionals. We work closely with other advisers to educate family members who are not managers on how to be successful business owners. As part of such engagements, we are frequently asked to structure equity equivalent or true equity packages to secure the long-term services of family and nonfamily professional managers.
Ownership Retention or Disposition
The decision to retain or dispose of a business may turn on many factors – such as the quality of available management, the need for liquidity, or the perpetuation of a family tradition. We regularly counsel our clients on the many alternatives available along a continuum of full retention to full disposition. We address the following issues:
- Recapitalization to create voting and nonvoting classes of shares to permit the retention of voting control while gifting equity
- Use of Voting Trusts to create a manageable voting system
- Shareholders' agreements among family and nonfamily members
- Structuring and negotiating private equity and venture capital investments
- Providing equity to employees through ESOPs (employee stock ownership plans) to realize both significant income tax benefits to the owners as well as the possibility of a tax-free disposition of some or all of the company.
- Gifting strategies that help our clients take advantage of their annual and lifetime gift tax exemptions through gifts to multigenerational trusts, the use of non-income taxable sales of some or all of the business to those trusts (IDGTs), private annuities, GRATs and other techniques.
- Planning for Subchapter S Corporations, including equity structures, qualified shareholders, distribution and transfer restriction agreements, planning for passive income tax, and selection of tax years
- Philanthropic dispositions, including advice on the tax efficiencies achievable in the use of charitable trusts or private foundations to perpetuate client businesses while providing lifetime and testamentary charitable contribution deductions.
Net Worth Adjustments to Meet Liquidity Needs
Businesses frequently constitute a significant part of a family's net worth and the senior generation's taxable estates. Planning to provide the liquidity necessary to pay death taxes in a timely fashion -- generally within nine months of death -- is strongly advised to avoid either the forced sale of a business or the burden of heavy borrowing to provide necessary liquidity. We advise clients on the many alternative sources of liquidity for the estate of a deceased owner, including:
- Equity redemption planning
- Life insurance funding
- Tax deferral available through elections under section 6161 or 6166 of the Internal Revenue Code
- Graegin loans to provide liquidity and reduce the taxable estate