Generation next

Plan early for the smooth transition of family business ownership

Yvette stewart
Guest Columnist
Taking your family owned business to the second or third generation has been called the ultimate test of success. And it’s a test that many business owners can be at risk of failing.

A 2003 study by MassMutual Financial Group and the Raymond Institute found that more than 40 percent of the CEOs surveyed who were planning to step aside in the next five years had not chosen a successor.

The study also found that for the great majority of companies, family ownership did not survive to the third generation. Forty-three percent of respondents were second-generation family managers, and just 23 percent were third-generation.

Business succession requires careful planning, especially if the company has significant value. Each case is unique, and business owners should put together a team of advisers – legal, financial, accounting and tax experts – who can help you minimize tax liability and ensure a smooth transfer as part of an overall estate plan. These are some of the key factors you should consider:

Start early. Five years is the minimum most business authorities recommend. Incorporate succession into your business plan, or write a separate transition plan. And make the planning a family affair – if you involve your family members in the process, you’ll have a better chance of preventing misunderstandings.

Choose – and train – your successor. This can be especially challenging in a family with several members who are active in the business. Early on, you can place potential successors in various positions at the company. This will provide them with experience and training and test their ability to run the business.

Valuation. This helps you plan succession with greater detail and accuracy. Businesses can be valued to be sold outright, or they can be valued for generational transfers through estate-planning techniques.

Arrange the transfer. There are several methods you can choose to transfer the business while minimizing the tax burden on your family. One option is "gifting" – transferring part of the business or stock to your child each year as a tax-free gift.

If you and your spouse own the business, you each can give up to $11,000 to each child tax-free every year. Also, you can give an additional $1 million of the value of the business tax-free during your lifetime – or $2 million jointly with your spouse. Greater amounts can pass estate tax free through your estate plan.

Trusts and family limited partnerships are other options. In the 2003 study of family businesses, living trusts, life insurance trusts and generation-skipping trusts were the most popular succession planning options among respondents.

A family limited partnership also can be an excellent vehicle for transferring the full value of a business to the next generation. By placing the company into a family limited partnership, owners can take advantage of discounts once the partnership interests are transferred to family members (during the general partner’s lifetime, or at death), that can significantly lessen the estate tax burden.

Transferring a business to the next generation is a complex and multidimensional process. Owners must decide if the potential tax savings of a family limited partnership are worth the increased legal and accounting costs that a complex plan might create. By surrounding yourself with key advisers who are experts in closely held businesses, you can help ensure that you identify all appropriate options and make informed decisions about all these factors.

Yvette Stewart, CTFA, is a senior trust officer with Wells Fargo Private Client Services in Vancouver, Wash. She can be reached at 360-759-4870 or

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