Family-owned businesses are the backbone of the American economy.  Family-owned businesses account for 64 percent of U.S. gross domestic product, generate 62 percent of the country’s employment, comprise 90 percent of all business enterprises in North America and account for 78 percent of all new job creation.1 Your family-owned business supports your family and is an integral part of the United States economy so, how will you plan for the succession of your business?

Have you considered which of the following might trigger your retirement: age, an interested and involved younger generation, personal financial benchmark or perhaps a company financial benchmark? Will your retirement only mean reduced or no operational work hours, projects, or board involvement? Will you retain control or profits, transfer business interests in a lump-sum, transfer voting and/or nonvoting business interests, transfer interests to certain or all members of younger generations and will transferred business interests be held in trust? Have you identified successors or interim replacements to your business? Have you considered what an emergency succession plan might look like as related to unanticipated absences and departures of key executives and directors?

An example of how this might work would be to maintain the role as the chairman of the board of directors and the controlling shareholder, which may allow the next generation to take over day-to-day decision-making, with the gentle threat of removal should the next generation demonstrate poor decision making.

Further, here are techniques that provide additional planning opportunities:

  1. Sale of Stock. This technique can accomplish the following: (i) the purchaser has a financial stake in the success of the business; (ii) the sale of stock freezes the value of the business as of the date of the sale, potentially resulting in a substantially lesser transfer tax to the founder and directly benefitting the purchaser to the extent of post-sale growth; and (iii) the founder can utilize installment sales to permit deferred payment of the capital gains tax on the sale until the cash is received.
  2. Voting Trust. A voting trust is a contract among shareholders in which their shares and voting rights are temporarily transferred to a trustee. As an example, a majority shareholder/parent might allow the sale of stock or redemption (all or part) subject to a voting trust whereby majority shareholder/parent maintains control of the votes of the stock transferred until a specified time or specified benchmark. Advisably, the majority shareholder/parent does not exercise their rights unless and until they sense poor decision-making by the next generation.
  3. Inter Vivos (during the lifetime of the donor) Gifts of Stock, might be used if to family of the founder, as one example. Whether to gift at death or inter vivos depends greatly on an analysis of the step-up in basis at death, the value of the business whenever the founder dies and how much the estate tax exemptions might be at that time.
  4. Intentionally Defective Grantor Trusts (“IDGT”). An IDGT is a type of trust where transfers to the trust qualify as completed gifts for gift tax purposes but the income of the trust will be reported by the grantor who will pay the tax on that income even though, by the terms of the trust, the income goes to the next generation, as an example. So, using that example, that founder’s children could receive an annual gift, not subject to the gift tax, in an amount equal to the income taxes attributable to the annual income payable to the children.
  5. Buy-Sell Agreements. A buy-sell agreement provides upon the death of the founder, their interest in the business will be purchased by the company, a particular shareholder or third party for a specific amount, which is typically a set amount or one calculated according to a certain formula. Company earnings or life insurance owned by the company can be used to redeem the stock.

It is imperative that you have a succession plan, and the Estate Planning attorneys at Mesch Clark Rothschild are here to advise you, help you determine what will work best for you, your family and your business as well as to prepare and implement your plan.


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