Developing a family business transition plan is a complex process, and although saving tax is an important consideration, it is not the only one. When you have spent much of your life establishing and successfully running a family business, of course it’s natural that you want to pass it on to the next generation, and to do so as tax efficiently as possible.  You haven’t done all that work just to hand a big chunk of the wealth you created over in taxes!

At Henry H. Jones, CPA, we’re passionate about helping family businesses get things right at the planning stages, including tax, of course.  But overemphasizing the role of tax planning in your family business transition plan is likely to lead to one that is not the one you really want. The main focus of your plan should be on what your business truly needs, and how you can help your family in the way that benefits them most.

Of course, every family business is unique.  Ours has its own characteristics, and so does yours. We all have issues that will continue when it is handed over to the next generation; or if it is not to be passed on, then how it is to be sold or wound down. Thus every transition plan is unique too, but there are also a number of key issues that must be addressed.

Family Business Transition Plan Preparation

  • You need to think about whether your children will still have enough cash to continue running the business after estate taxes have been paid. You also need to ensure that you have valued the business correctly and that you have done everything possible to reduce the tax liability.
  • Ask yourself, “Do my children really want to run the business and are they capable of doing so?” Remember that only one in three businesses pass successfully to the next generation (read more here).
  • How will you equitably deal with your children who wish to stay in the business and those who want to do their own thing? Have you made any family promises that you must stick too? (read our post on the generation gap here)
  • What are the issues regarding other stakeholders? For instance you might have a divorced ex-spouse who still holds stock and voting rights but has no other involvement in the business. Make sure these issues are considered.
  • Will the business still be able to function if there are probate delays following your death? Probate can take a considerable time.  Possibly the best solution is to set up a trust which can give the trustees permission to transfer wealth prior to probate.
  • Will the business still be able to provide you with a retirement income and will doing so conflict with the interests of the new owners?
  • What is the actual value of the business and how do you measure it?
  • Are there likely to be any disputes regarding ownership and management?
  • Is succession the best solution or would it be better to sell the business?

Addressing tax issues is part of the package but only part. You want to ensure that the family business transitions in the way that you wish, but you have to also factor in all these other issues.

Family Business Transition Plan: Moving Gradually

Naturally it is important to ensure that you maximize the value of the business and you will need to make plans to do this which will include the various taxes and how to reduce them. There’s much to be said for transitioning your family business gradually. You keep control while gradually passing over power to its future owners. This can have a big impact on your tax position too as long as you keep below the annual gift tax liability levels.

But it all depends on your unique circumstances so your first step is to talk with an an expert on business transitioning – and fortunately, we’re right here! Your family business transition plan can begin anytime. No one case suits all, but it is certainly not all about saving tax.