Estate Planning for Family Businesses: Preserving Your Legacy


If you’re a family business owner, you can’t overlook the importance of an estate plan. Such plans are an invaluable tool to protect your business’ physical and financial assets, along with your own assets and wealth. They’re essential for efficient wealth transfer to the next generation of your business and dictate exactly how this should be done. 

However, there are several factors to consider when it comes to estate planning. Below, we’ll take a deep dive into these, to help you preserve the legacy of your family business.  


Understanding Estate Planning for Family Businesses

So what exactly is estate planning for family businesses, and why is it important? An effective estate plan will help you to transition your business to the next generation smoothly. It ensures business continuity and preserves your family wealth. Your plan can protect your business from possible legal disputes, minimize tax liabilities, and even provide for family members not involved in the business. Essentially, it’s a guide for how your business will continue when you’re no longer around to oversee it.

Of course, there’s no one-size-fits-all estate plan – it’s tailored to the needs and structure of your family business. Still, most estate plans for family businesses have the same components, including:

  • A succession plan to identify future owners, and ensure they have the right skills and tools to continue running the business according to your wishes.
  • A buy-sell agreement, which outlines the terms and conditions surrounding how your business interest can be bought by remaining or future owners. This helps prevent possible disputes down the line, establishes a fair business valuation, and gives your estate liquidity.
  • Information on business entity selection (or restructuring), in case the need arises for a change. After all, different business entities can affect your business’ tax liability.
  • A tax planning strategy. Planning and preparing for anticipated taxes is essential to ensure that your family can still meet the needs and objectives of the business and stay compliant. 

Unfortunately, even the most effective estate planning may present you with a few issues. 


Common challenges in estate planning

A chief concern during estate planning for family businesses lies in decision-making. For example, this could be choosing who will be the ‘leader’ of the business, what their responsibilities will be, and what powers they’ll exercise. Your plan might also leave you with disgruntled family members who aren’t happy with how things will be going forward. 

Another possible stumbling block to consider is operational challenges. Once your plan is in place and the transfer begins, you need to know that your successors can do what is expected of them. 

A final (and often most important) consideration is communication. Your family or employees may not like the idea of change, nor understand how these changes will affect their futures. It’s essential to effectively and communicate exactly what they should expect. 


To help mitigate these potential issues, we recommend having an expert on hand. A business advisor, for example, can help you objectively reach the best conclusion for any difficult situations, in a way that will ensure your business thrives. 


Key Components of Estate Planning

Beyond the factors mentioned above, there’s a lot to consider when it comes to estate planning for family businesses. This includes your will, the possibility of establishing a trust, and granting power of attorney. Each of these factors can help you safeguard the business and its assets, and tailor your estate plan to your needs. 

Your will doesn’t just clarify who receives your personal belongings. It should outline how your financial assets, including retirement funds, will be distributed and used. For example, your buy-sell agreement might stipulate that payouts from life insurance or retirement funds can be used to purchase additional shares. 

Establishing a trust can help alleviate the burden of choosing a single successor, in favor of a group of identified individuals (or even an unrelated third party). The purpose of a trust is to hold specific assets and distribute them to a beneficiary at a specific time. That way, you can protect these assets from probate, while minimizing their tax burden. 

Granting someone power of attorney effectively names them as the one to make decisions on your behalf, if you are unable to do so. This should be a trusted individual who will make choices based on your interests, as well as those of the business, and can prevent any claims against unfair decisions. 

Additional factors to consider 

Keep in mind that the earlier you transfer assets to the next generation, the better. Early transfer can help prevent future appreciation (and thus higher taxes) on your estate. 

But what if your successors just aren’t ready yet? There are ways to transfer ownership without you relinquishing control. As mentioned above, you could establish a trust to oversee how and when assets are transferred. 

You could also set up an employee stock ownership plan (ESOP), through which your family can slowly buy shares from you over time. That way, they become more involved with the business over time, as they’ll also benefit from the company’s success. 

By establishing standard operating procedures (SOPs), you can formalize the processes involved in making business decisions. This can help with day-to-day management, and avoid potential internal conflicts. Your SOP should align with your business’ mission and value statement, to provide a clear roadmap for the company, and your long-term vision for it.


Tax Implications in Estate Planning

A significant challenge surrounding estate planning for family businesses is estate taxes. These taxes are assessed according to the fair market value of your estate, meaning that any appreciation in your estate’s assets over time will be taxed. And the rates can be quite high. For estates valued at between $0 and $10,000 the estate tax rate is 18%. This rate increases as the value of your estate increases, to $1 million. At this point, the tax is calculated as a flat rate of $345,800 plus 40% of the amount over $1,000,000.

It’s worth noting that any part of your estate bequeathed to a spouse is not subject to estate taxes. However, this doesn’t apply to other family members. As such, estate taxes can have a significant impact on your estate plan, as well as your business’s future tax liabilities. 

One way to partially work around the burden of estate taxes is through the Internal Revenue Code Section 6166. This allows your estate to defer taxes and pay them in installments. Essentially, it means that the estate pays only interest for four years. Thereafter,  the rest of the taxes due are paid over a decade in annual portions. However, this does not cover all estate taxes – only an amount equal to your successor’s share of business interests. Moreover, there are a number of qualifying factors to be eligible for deferral. 


A tax expert can help your family business navigate the process with ease. 


Business Succession Planning

As stated earlier, succession planning is an important part of estate planning for family businesses. However, this doesn’t need to be daunting. 

The first, essential component of succession planning is outlining your goals and objectives. This might require a new collective vision for the business, which accounts for how the next generation will manage the company.  

Next, you need to establish a decision-making process. This should outline all the governance processes for involving your family in making decisions, including how to resolve potential conflicts. It’s important to document these processes in writing, and to communicate them with all stakeholders. 

Then you can establish the succession plan, including who will do what, and when. This should also include a strategy for handling business taxes, and outline any training and skills your successors need to efficiently perform their roles. 

Tax-efficient methods of transferring business ownership

There are several ways of transferring business ownership, and each has its pros and cons. For example, you could transfer the business through your estate plan, by including it as part of your estate, as dictated by your will. This is the simplest method. Although if your business does not have liquidity, it could mean trouble with the tax man, because of the estate taxes we’ve already discussed. 

Another option is to make a direct gift to your business. This allows for more flexibility, because according to federal tax rules, you are allowed to transfer up to $12.92 million in your lifetime, without being taxed. However, once gifted, your successors will be liable for all taxes. 

To gift your business, you’ll first need to have a valuation done by a professional, so that the amount determined can be reported on their tax return. You can gift the entire business, or parts of it, to an individual or trust.

This way, the portion of the taxable estate is reduced, and ownership is immediately transferred. On the downside, if the value of the business is higher than your successor’s available federal gift tax exemption, they may have to pay up. And if your family then decides to sell the business, and makes a profit, they will be subject to capital gains tax

Another option is to sell your business to your family in exchange for a promissory note. This gives you income through note payments, which can be structured to best suit everyone’s needs. However, it can be risky if your successors can’t make payments. This method allows you to freeze the estate value to that at the time of sale, but means that you may be subject to income tax


The Use of Trusts in Estate Planning

Trusts help your business avoid probate; the legal process is completed when you leave assets to distribute. Probate can be expensive and often, pretty drawn out. They can be established for businesses of all sizes, and different types are available. 

Irrevocable trusts 

A Grantor Retained Annuity Trust (GRAT) is the perfect example of an irrevocable trust. Basically, you move your business into the trust and name the family members you want to receive the business as beneficiaries. This means you’ll receive a regular payout for a set number of years, which treats the assets as returned to the grantor

After the specified period, whatever is left in the trust goes to your beneficiaries. It’s an effective way of lowering estate taxes. However, these trusts are subject to interest rates, so their performance can change depending on interest rate fluctuations. 

Revocable trusts 

Here, your family business is placed into a trust which designates the owner as grantor and trustee. That means you can retain control of the business until the conditions are met (such as your death or disability, or an heir reaching a certain age etc.).

These trusts feature explicit instructions for how the business should be managed thereafter, and by whom. You can also name a trust protector, who has the ability to change successor trustees managing the business. 


Planning for Liquidity in Estate Transitions

Liquidity refers to your business’s ability to cover immediate costs with available cash flow. After all, your estate may be a valuable asset, but without access to cash or liquid assets, you run the risk of negatively impacting business operations during the transfer. Thankfully, there are several ways to overcome liquidity issues. 

For example, you can purchase life insurance and place this in an irrevocable trust. That way, once the trust pays out, there will be sufficient cash available to your successors to cover estate taxes and any unforeseen expenses

Of course, it’s also possible to borrow funds to cover cash flow problems, but this naturally means that these repayments (which will include interest) can be met. As such, this is not a sustainable long-term option. 

Another option is to sell off assets which can easily be converted to cash, for continued business continuity. 

And then there are your buy-sell agreements. These outline the conditions for the process of transferring ownership. But they can include clauses for stock repurchase, or options detailing how remaining owners can purchase the interest of the successor. That way, you provide liquidity to the estate. 

No matter the option you choose, your liquidity planning should form part of your estate plan. 


When in Doubt, Consult a Professional

Tax laws are ever-evolving. If you own a family business, you must stay up to date with any laws and regulations that could impact your business or your family. Thankfully, with professional assistance this is easy, and these changes may even be harnessed to your advantage. 

A tax professional or CPA can help you navigate the changing laws, and how these impact your financial management. Moreover, they can help you come up with strategies to effectively manage not just your day-to-day finances, but long-term goals and tax planning. 

For help navigating estate planning for family businesses, schedule a Discovery Call with one of our expert CPAs. We’re here to help your business thrive, in this generation and the next.

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