Estate Planning and Succession for Family Businesses

April 2, 2018


Family businesses are common in the United States, across the entire spectrum of services and industries.  Often, they start out as sole proprietorships or partnerships, and then as children become adults and want to join, the business can expand into a different type of structure.  It is natural for parents who are business owners to want to include their children in their success, especially since they may one day inherit ownership of the business.

Nonetheless, the issues of business structure, participation and investment all play a role when it comes to succession planning.  There is no one strategy that will fit every family business situation, and there are a number of issues that can affect how the business is included in estate planning.

Original ownership structure: The original structure used may not be suitable as the business grows, especially if children or relatives are given ownership interests.  However, changing the structure can affect valuation, ownership share of the founders and tax rates.

Non-participating children: There is always the question of what to do about children who choose not to be a part of the business and pursue a different career.  While they may not have an interest in the business itself, as heirs they will be concerned about asset preservation and ownership structure.

Tax consequences: A key estate planning and succession issue is taxation and how different strategies can affect both parents and children.  When a family business is included in the estate, there may be a need for the use of trusts to minimize or defer taxes.

Non-family business partners or owners:  If a business has non-family partners or shareholders, this will need to be accounted for in any succession plan.  Naturally, non-family owners will need to know how the business might be affected by any succession plan.

Management and continuity:  When the founders retire or die, there should be a clear plan for ongoing management of the business to ensure continuity.  This is one of the inherent risks for any family business, especially if one or more founders die suddenly.

Making a Succession Plan
These issues make it clear that a succession plan is essential for any family business.  This will require the advice and guidance of an estate planning attorney and tax experts to ensure that business assets are preserved and distributed fairly to heirs.  Initial planning will begin with the founders or owners, and may include other family members at later stages so everyone knows how the business will continue in the future.  Please call Attorney Andrea K. Shoup at 951-445-4114 if you have any questions.

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