Experts Break Down the Complex Legal Landscape for Succession Planning


Baby boomers are likely to pass on about $48 trillion in assets to subsequent generations over the next 25 years, often through family businesses, in one of the largest wealth transfers in human history.

This means owners must develop a solid succession plan to ensure the long-term survival of the business, lawyers John Overby and Scott Whittaker said at a recent Tech Park Academy event at the Louisiana Technology Park.

Overby, an estate planning and administration specialist, said he routinely counsels owners of closely-held businesses and high-net-worth individuals in their estate, tax and business succession planning. Whittaker is a 30-year corporate lawyer who has handled hundreds of mergers and acquisitions and corporate finance transactions.

“When closely held business owners approach retirement age … and start considering business succession planning, they’re often confronted with very difficult decisions,” Overby says.

Here’s an overview of what these experts shared.

Tax Considerations

Overby says that as business owners retire, they typically prefer to leave their company to children or grandchildren who are actively participating in the organization, while also treating all of their descendants fairly. But there are major tax considerations to navigate.

The federal government imposes three taxes on the transfer of property by gift: the gift tax, the estate tax and the generation-skipping transfer tax. “There are a variety of gifting and sales techniques available, all of which in one form or another minimize these taxes and provide a benefit to the business owner and his children or grandchildren,” Overby says.

Currently the federal government allows for an exemption of $11.4 million per person on these taxes that can be allocated to lifetime gifts of assets. The law is scheduled to sunset in 2026, reverting back to $5 million, indexed for inflation, barring additional action from Congress.

Often a major concern for business owners with children active in the business is how to treat all of the children equally in the business succession process. If the owner decides to transfer the business to family members, the transaction should be structured to minimize taxes.

Leveraged Transfer of Business Interests

Overby says one of the most important goals during the estate planning process is to transfer more value than is accounted for under the transfer tax rules. For example, a business owner could gift a $1 million asset but utilize only $600,000 of the exemption amount. “That’s one of our overarching goals — how do we achieve that discount?” he says.

To achieve that leverage, clients will often transfer the minority interest in their companies because prior to a liquidity event, a minority share in a company is worth less than its proportional share in the company. That’s because a minority owner can’t force a sale of a business. “When you take that into consideration, the IRS begrudgingly allows valuation discounts for lack of control and lack of marketability,” Overby says.

Transfers of the business interest may take the form of a gift to the business owner’s heirs directly, a trust on their behalf or a sale at a discounted value. A sale of a business freezes the value of the organization, which essentially converts an appreciating asset into a fixed-value asset. “Although we like to keep things as simple as we can, our typical response is you ought to consider a trust for the donee’s interest,” he says.

Overby also discussed the utility and popularity of the unusually named Intentionally Defective Grantor Trust, an estate-planning tool used to freeze assets of an individual for estate-tax purposes, but not for income tax purposes. In this case, the term “defective” describes the effect of income-taxation rules on these instruments. “The transferor has done his or her estate planning by removing the asset from their estate but retains their obligation to pay the income tax on their trust assets,” he says.

Selling to a Third Party

Whittaker provided an overview of key considerations when business owners opt to sell the business to a third party. These would apply in instances such as when the owner’s children don’t want to go into the family business, when the parents retain control of the business so long that the children establish their own careers or when the business owners realize their children aren’t capable of taking over the business.

In these cases, Whittaker says, the best course is often to sell the business and split up the money.

The most common transactions to make this happen are a sale to a strategic buyer in the same industry or a sale to a private equity buyer, Whittaker says. Other common deals include a management buyout or a sale to one of the children on an installment basis. Other owners opt to split up the company when it’s involved in multiple lines of business.

Whittaker says the first step is a feasibility analysis that weighs the business’ cash flow relative to what a sale would yield. If you opt for a sale, trustworthy financial statements are of the utmost importance, he says.

“If you’re going to sell, the buyer is going to crawl all over your financial statements,” he says. “If you don’t have audited financial statements, or at least reviewed financial statements, now is the time to be thinking about that.”

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