Strategies for Family-Owned Businesses

Few people have more estate planning issues to deal with than the family-business owner. The business may be the most valuable asset in the owner’s estate. Yet, two out of three family-owned businesses don’t survive the first generation. If you are a business owner, you should address the following concerns as you plan your estate:


Who Will Take Over the Business When You Die?

Owners often fail to develop a management succession plan. It is vital to the survival of the business that successor management, in the family or otherwise, be ready to take over the reins.


Who Should Inherit Your Business?

Splitting this asset equally among your children may not be a good idea. For those active in the business, inheriting the stock may be critical to their future motivation. To those not involved in the business, the stock may not seem as valuable. Perhaps your entire family feels entitled to equal shares in the business. Resolve this issue now to avoid discord and possible disaster later.


How Will the IRS Value Your Company?

Because family-owned businesses are not publicly traded, knowing the exact value of the business is difficult without a professional valuation. The value placed on the business for estate tax purposes is often determined only after a long battle with the IRS. Plan ahead and ensure your estate has enough liquidity to pay estate taxes and support your heirs.


Take Advantage of a Special Estate Tax Break

Congress has long struggled with whether it should grant additional tax benefits to family-owned businesses, recognizing that families might have to sell their businesses just to pay estate taxes. This, of course, will no longer be of concern if the estate tax repeal is made permanent. But until that time, it will be critical for business owners to plan carefully.

As part of the Taxpayer Relief Act of 1997, Congress passed an increased exemption provision to provide relief for family-business owners. The exemption, when added to the regular estate tax exemption, can equal as much as $1.3 million per individual. But a family business must meet a number of technical requirements and perhaps implement some difficult planning decisions for the business to qualify. Under EGTRRA, this exemption is effectively eliminated in 2004, when the estate tax exemption increases to $1.5 million.

In addition, the law has provided two other types of tax relief for business owners:


Section 303 Redemptions

Your company can buy back stock from your estate without the risk of the distribution being treated as a dividend for income tax purposes. Such a distribution must, in general, not exceed the estate taxes, funeral and administration expenses of the estate. One caveat: The value of your holdings must exceed 35% of the value of your adjusted gross estate. If the redemption qualifies under Section 303, this is an excellent way to pay estate taxes.


Estate Tax Deferral

Normally, your estate taxes are due within nine months of your death. But if closely held business interests exceed 35% of your adjusted gross estate, the estate may qualify for a deferral of tax payments. No payment other than interest is due until five years after the normal due date for taxes owed on the value of the business. The tax related to the closely held business interest then can be paid over 10 equal annual installments. Thus, a portion of your tax can be deferred for as long as 14 years from the original due date. Interest will be charged on the deferred payments. (See Case Study)


Case Study

Sometimes Putting Off Until Tomorrow Makes Sense

Lee owned a small manufacturing company that accounted for 50% of his estate. When he died in October 2000, his estate’s total estate tax liability was $1 million. Half of the liability was due at the normal due date of his estate’s tax return in July 2001 (nine months after Lee’s death). The other $500,000 of liability could be paid in 10 installments, starting in July 2006 (five years and nine months after Lee’s death) and ending in July 2015. Lee’s estate would also have to pay interest on the unpaid liability each year.



Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.

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