Succession Planning for Family Businesses
Running a family business may be a deeply rewarding career, especially when the business grows and thrives over the course of several decades. When the time comes for an owner to retire or make late-life decisions, they will need to protect the future of the business and other family members. The laws in this area are often complex, and owners of family businesses may have several options to consider with the assistance of an estate planning attorney. At Martin Heller Potempa & Sheppard, our Nashville business succession planning lawyers can advise Tennessee residents on how to efficiently and securely transfer their interest in a family business, causing as little disruption as possible to either the business or their loved ones.Succession Planning Tools for Family Businesses
One of the main goals of the business succession planning process is to minimize the tax impact of transferring a business to the appropriate successors so that its assets are preserved. In some situations, a family business owner may choose to simply sell their interest in the business to another family member or someone whom they trust to run its future operations. This may occur at retirement, death, or any other time of the owner’s choosing. Transfer taxes will not be applied to the transaction if the owner sells their interest for the full market value of the business. Another version of this strategy is a buy-sell agreement, which allows an owner to retain their interest in the business until an event provided by the agreement occurs. (This is often retirement or death, but it may also be an event like a divorce or an incapacitating condition.) The buyer of the business commits to buy the owner’s interest at full market value, and all of the terms of the transaction are set in advance. This may provide comforting security to some business owners.
Under the Internal Revenue Code, moreover, a family business owner may be able to create a systematic gifting program to gradually transfer their interest in the business to their successors over an extended period of time. These transfers may be conducted without incurring transfer tax, although if the business has a relatively high value, the process may require many years to complete.
More complex estate planning tools include a grantor retained annuity trust or a grantor retained unitrust. Both a GRAT and a GRUT are a type of irrevocable trust that allows a family business owner to transfer appreciating assets into it while receiving an annuity (in a GRAT) or a unitrust payment (in a GRUT) during a set term of years. The difference between them is that a GRAT provides fixed periodic payments, while a GRUT provides a fixed percentage of the trust assets. When the payment period ends, or the owner passes away, the successors receive the remaining assets in the trust. These tools reduce the value of the owner’s interest and thus reduce the amount of the transfer tax as well.
A business owner may also choose to make a private annuity arrangement, under which they transfer their entire ownership interest to a buyer in exchange for periodic payments for the rest of their life. This transaction is classified as a sale rather than a gift, so transfer taxes will not be imposed. Similarly, a self-canceling installment note allows a family business owner to transfer their ownership interest to a buyer and receive a promissory note in exchange. The promissory note requires the buyer to make payments to the owner for the rest of their life and allows the owner to avoid transfer taxes.
In some circumstances, a family limited partnership may be an appropriate option to consider, if other family members are interested in acquiring the business. An owner may use this business form to retain control over business operations by holding the general partnership interest while transferring limited partnership interests to other family members as gifts.Consult a Nashville Lawyer for Your Business Succession Planning Needs
At Martin Heller Potempa & Sheppard, we understand the nuances of estate planning instruments and the related tax issues that may arise for family business owners and others. Our Nashville business succession planning attorneys recognize that each person’s situation is unique, and we will take the time to understand your personal needs and goals. To set up an appointment, call us at 615-800-7096 or contact us online. We represent people throughout Davidson and Williamson Counties, including in Franklin, Hermitage, East Nashville, Sylvan Park, and Bellevue.