BUSINESS SUCCESSION LEGAL PLANNING

By Parag Patel, Esq.

If the U.S. Government is your favorite charity, rest assured, it will find a way to use your donation.  But wouldn’t it be better to give your money to your children? 

Studies show that 60% to 70% of all family-owned businesses, including hotels, have no business succession plan in place or no one to take over the reins.  This leaves third-party sales, family limited partnerships and buy-sell agreements as the most likely methods of transfer if a business is to continue. 

Proper business succession planning will protect you from a potential liquidity shortfall and intervention by the IRS, and will ensure your successor (i.e., your son, daughter, nephew, etc.) receives the maximum value upon transfer of your business.

Gifting and Family Limited Partnerships:
A substantial portion of the estimated $6 trillion to $8 trillion of personal wealth that will transfer over the next 10 years consists of family business interests, including hotel properties.  Unlike publicly traded securities, no ready market exists for closely held private interests.  Each business therefore represents a unique and challenging valuation problem to the IRS with respect to estate and gift taxes.  One way to deal with this problem is gifting.  With a new IRS ruling allowing for gifts of minority shares to family members at a discount, individuals considering a transfer of shares of a family business should gift the shares now.  The formation of a family limited partnership holding all shares of your business interests is a common and popular way to maximize gifts and still maintain control of your businesses until you are ready for your successor to takeover the business.

Valuation of Your Business:
Disputes over business value are a leading cause of tax challenge between the IRS and business owners.  The transfer must be well-documented by an independent expert.  The valuation process has been around since 1959 and has been well-treated by the courts.  It carries stiff penalties for over-under valuation, hence strict adherence is mandatory.

Buy-Sell Agreements:
A family business should have a buy-sell agreement in place that specifies terms of ownership and price of transferred shares between family members in the event one of the them retires, leaves the business, becomes disabled or dies.  Of course, the lower the specified share price, the lower the estate and gift tax value of the shares. The specific mechanism for setting the price of the shares in the agreement has been a subject of controversy for many decades. 

Regardless of your method of planning, you have worked too hard to build up your business to have it lose value or fall apart when you can no longer run the business. I have had too many clients that simply fail to do any business succession planning and ultimately give the U.S. Government more in taxes. The time is now to think about tomorrow.