Five things you should know about estate planning for a family-owned business

You and your family may have built and own a successful business. But have you taken the steps needed to sustain it? Business ownership complicates your estate and requires careful planning to make a successful transition.

  • Your family, management team, and key stakeholders must understand your succession plan. Depending on its size, your business may need a plan that takes several years to fully develop and implement.

    Successors must be identified and prepared.Smaller businesses on the other hand simply may need someone to oversee a sale or liquidation.Wherever you may be on that spectrum, communication with and buy-in by the core constituents is crucial.

    Ideally that entire group will have a clear understanding of your goals — what is supposed to happen and how to achieve it — long before the time comes.

  • Address your liquidity needs. Business owners are often highly illiquid due to the magnitude of business value compared to other assets. Liquidity in your estate plays a critical role to provide for your family and replace your earnings. Where estate tax is owed, liquidity is needed to pay those taxes (due 9 months after death.)The alternative may be a forced sale of the business. Life insurance is often the preferred solution. Careful structuring of life insurance policies through irrevocable trusts is recommended. Additionally, the business itself might own a policy on you to help pay down debt, provide working capital, or replace your leadership and on-going contributions.
  • Structure your company ownership to separate control from value. If you own a controlling interest in the company, having both voting and non-voting stock (or managing and non-managing interests in a partnership or LLC) creates significant flexibility in your estate. One person or group can be identified to run the business and legally control it (by owning the voting stock), such as key family members working at the company or perhaps a broader committee.

    Another group still can receive the economic benefits of ownership through non-voting stock without involvement in the business operations. Using trusts to own both voting and non-voting stock is often preferable to outright ownership.

  • Plan early to reduce your estate tax liability. Federal estate tax of 40% applies to estates over $5.45 million ($11.9 million for married couples). You may be able to materially reduce that liability through effective lifetime wealth-transfer planning.

    Using planning strategies currently recognized under federal tax law, an owner of a profitable, cash-flowing business could transfer significant wealth out of the owner’s taxable estate and into trusts for family at little to no gift tax costs.Popular strategies include both installment sales of stock to irrevocable “defective” grantor trusts (IDGTs) and funding grantor retained annuity trusts (GRATs.)

    Where successful, these strategies can reduce the need to purchase life insurance or set aside liquid assets in your estate to pay the tax. These strategies require significant expertise to properly implement and, importantly, time to play out. Starting when you are healthy is prudent.Also, don’t assume that these planning opportunities will remain available indefinitely. Proposed legislation in Congress could significantly reduce these techniques’ effectiveness.

  • Only certain trusts can own S Corporation stock. Federal tax law contains detailed requirements for such trusts. Review your trust with your legal advisors to ensure that it will qualify. Otherwise, the trust may have to sell the S stock, or the company may lose its S election.

Estate planning for a family business owner is a complex and on-going process. Addressing the points above and working with a team of experienced family business and legal advisors can help you reach the best outcome.

Scott J. Mahon, J.D., CFP is managing director of wealth strategy for Ascent Private Capital Management of U.S. Bank. Contact: [email protected]


A business succession strategy without a management succession plan can result in a lost legacy

When lawyers, accountants, financial advisers and business owners look ahead to plan business succession, they discuss legal documents, tax code, investment returns and valuation (usually 10x EBITDA).  Rarely does anyone mention management succession. This is surprising because most owners, especially family owners, care about their legacy, yet without a solid management succession plan, the “family legacy” will be in jeopardy.

What is management succession planning? Simply put, it is the act of focusing on the future of your organization as it relates to the “people” side of the business. Typically, most people think of succession planning as it relates to replacing a retiring CEO. However, it is equally crucial to extend succession planning to the entire management team and even to other key employees. Proper management succession planning is often the difference between the continuity of a viable, thriving organization and one that goes out of business.

Some valuable tips for developing a succession planning process include:

  • Management succession planning should be an ongoing process started well before businesses transition. Management should always be cognizant of who are the organization’s best people, at every level. They should incorporate an ongoing initiative to get to know potential up-and-coming employees by understanding their backgrounds, experiences, and talents in order to groom them for the next steps in their careers.  In particular, a CEO should identify between five and 10 people in key positions on whom they are going to focus, in order to “observe” them in various situations and scenarios.  This becomes the core succession group and key to your succession success.
  • How does one identify the five to 10 key positions? One might begin with senior management, who are direct reports to the CEO/owner, and add key management positions throughout the organization. Usually the initial positions selected will be the top finance, sales/marketing, manufacturing, operations, legal, and human resources jobs.
  • How does one know what type of qualities are needed in the succession management group? Develop a job outline or job description of each of the identified positions. Be sure to include duties/responsibilities, background/experience required, competencies/behaviors needed and required accountabilities. In addition, it will be valuable to outline the type of actual job experiences or positions, that you feel each person must have touched in their career, either within your company or at another employer.
  • When does one communicate to the person that they are being considered for the succession management group?  Tread slowly!  There are varying thoughts on the subject of whether or not one should tell someone they are a potential successor until the time comes. I believe it is important for key employees to understand their potential future with the company, especially to enhance enthusiasm and loyalty even in the short term. Overall, it is best to make the decision that is right for your company.
  • What if you don’t have internal successors? Depending on the size of your business, it might be hard to develop someone internally. Therefore you may need to hire from outside your organization to fill your need. That is OK as long as you spend time identifying the qualities and experience you’ll need to have in the person you select for the role.

In closing, the responsibility for succession planning rests with the entire management team and not just the CEO. It is the team’s collective responsibility to take the long view and adopt a legacy approach to management so that your work, culture and values will carry on.

Jim Geier is a writer, speaker, and CEO of Human Capital Consulting Partners, helping companies align organizational performance with shareholder expectations.  Follow Jim on LinkedIn and Twitter @geierstrategy.  Website: