Planning family business succession is a high art requiring a not only a thorough knowledge of the related tax law and state business entity law but also, a sensitive understanding of the personal relationships among the family members. This article includes links to Internet resources on all aspects of family business succession planning.
Choice of Entity
Succession planning requires an understanding of why the entity involved was chosen and whether it should be converted to a different type of entity.
Jason Havens' Partnership Choice of Entity outline compares general partnerships, limited partnerships, S Corporations and LLCs and lists the advantages and disadvantages of each.
Choice of Entity offers a tutorial on the selection of a business entity, including the creation of a business plan template. It’s directed toward the public, but is, nonetheless, a useful basic review for practitioners.
Family business succession planning in general
The Estate Planning for Family Business Owner coursebook library (ALI CLE) has several useful offerings addressing family business planning, including succession.
Halah Touryalai, Saving the Business Owner—From Inaction (Registered Rep, June 2008), emphasizes the need to focus family succession plans on the larger issues of continuity and to continually maintain them.
Legacy By Design, LLC offers eLegacyConnect, a web-based service providing succession solutions for farm families. For a fee, this website provides farm and ranch owner/operators with a step-by-step analysis of succession planning, including a primer on the succession process, suggestions for intra-family communication, action plans and how to review and refine the succession plan. The site includes a Community Forum discussing various estate planning and succession topics. A Resource Center provides a variety of articles and a Succession Blog is also maintained. A 14 day free trial is available. eLegacy Connect is discussed in more detail in the author's July 2013 Tech Review.
Another helpful source of estate succession information to share with farm and ranch clients is R. Branan, Planning The Future of Your Farm Workbook (The Branan Law Firm), which addresses the risks in farm transfers, family communication, goals and objectives, evaluating farm resources, farm estate planning and transfer tools, preparing and maintaining estate-planning documents and working with professional advisors.
Transitions Dynamics, Inc. recommends conducting a pre-administration of the family succession plan, which they refer to as a “fire drill,” to test whether an adequate succession plan is in place. They suggest a process of creating an environment for family communication, developing the process needed to achieve the family goals, implementing the process (including individual work plans and intra-family communication) and, thereafter,. reviewing and measuring the process. They note that there are certain triggering events in families in business together which should initiate succession planning, such as changes in family life, changes in the business itself, changes in the business assets and the business environment and philanthropic events. Transitions Dynamics applies the Birkman Method to the analysis of the passions, behaviors, motivations and interests of family members.
The Upchurch, Watson, White and Max law firm furnishes the papers Family Business Mediation - Anatomy of the Process, discussing the fundamentals and the process of family mediation in a business context; and Clan Dynamics for Estate Advisors, stressing the issues of addressing family conflicting goals within the context of the family clan. Available at http://www.uww-adr.com/resources#.U3NV29hOUv0.
Alexander, Preserving the Family Business (March 2010, Private Wealth), is an interesting discussion of family and family business dynamics, stressing that, in some instances, the children need to be kept away from the family business. For commentary on the effect of sibling rivalry on business succession, see Bernstein, Sibling Rivalry Grows Up (WSJ 3/20/12).
Budge, Integrating a Non-Family CEO Into the Family Business, March 2013 Trusts & Estates 48, discusses the circumstances indicating a need for non-family executive, development of outside members of the board of directors, selection of such a person and development of authority and job definition.
Other online resources on business succession
John L. Ward, Perpetuating the Family Business (Palgrave Macmillan, UK 2004), focuses on saving the family business and the family that is in business together (or will be). He stresses that the basic conflicts between the family system and the business system must be resolved and suggests steps to that end. See the review of Ward, Perpetuating the Family Business by Jeffrey Galant (Steve Leimberg’s Business Entities Newsletter, 4/10/2014).
Owen Fiore’s, Succession Planning 101 - A New and Better Era (Fiore Wealth Planning Consulting 9/29/2013), lists and discusses a number of important non-tax issues in succession planning, particularly those involving intra-family relationships.
Fiore, A New Era in Estate and Succession Planning (NAEPC, December 2013), discusses business succession planning after ATRA and its importance in planning, regardless of the federal estate tax involved.
UMass Amherst Business Center, Related Matters newsletter provides a plethora of links to articles and materials on family business planning and succession, including working with non-family members.
Burbank, Succession Planning When There’s No Apparent Heir – 10 Steps to effective succession planning (BuySellBiz.com).
Findlaw, Small Business Succession Strategies (CalCPA) is a good client handout.
Hoffman, Case Study: A Family Business Succession Plan with Zero Estate Tax and a Large Charitable Bequest (PGDC 10/18/2012) discusses the integration of charitable planning with a succession plan.
Business entities and the step up in basis
Business entities that were designed to result in value adjustments that mitigate the impact of the federal estate tax may no longer be necessary and, in some family circumstances, should be revised or eliminated. Such entities reduce the efficiency of the step-up in basis at death because of discounted values of the decedent’s interests in them and provide only a step-up in the basis of the entity interests (except where IRC Section 754 applies), rather than individual assets. In the case of depreciable property, such individual asset step-ups in basis result in immediate income tax benefits. This area of practice is discussed in the author’s Tech Review, Online Resources for Income Tax Planning as Part of Estate Planning (Wealth Management 4/16/2014).
Gorin, The Times They are a Changin’: Business and Tax Planning in 2013: Using Limited Partnerships, LLCs and S Corporations to Minimize Taxes (ABA 2013), addresses income tax vs estate and gift tax, I.R.C. Section 754 elections, basis step-up issues in S corporations, exiting from or dividing a business, recommended structure for new entities in 2013 or later (with a flowchart) and distributing assets by drop-down into a partnership and the value-freeze alternative. This paper is an excerpt from Gorin’s Structuring Ownership of Privately-Owned Businesses: Tax and Estate Planning Implications, available to subscribers to the author’s newsletter at firstname.lastname@example.org.
See also, Neiffer, How Step-Up in Basis Works (Farm CPA, Feb. 26, 2013).
Fundamental to estate planning and business entity planning for families in business together is an understanding of the personal dynamics of the family situation. For internet based resources on the subjective family relationships side of family business planning see:
G. LeVan, The Survival Guide for Business Families (LeVan Company 2003) is the seminal work in this area.
The family side of family business succession planning is discussed in depth in Chapter 16 of Kelley, Ludtke & Steinmeyer, Family Business Organizations (ThomsonReuters, 2d ed).
The Radical Collaboration website includes articles and analyses on organizational collaboration an offers J. Tamm & R. Luyet’s Radical Collaboration: Five Essential Skills to Overcome Defensiveness and Build Successful Relationships.
The BMC Associates website includes a number of helpful articles that relate to families in business together.
The internet provides many resources on the fundamental issues of family business and succession planning, including choice of entity, procedures for ownership and management succession and dealing with intra-family tensions and conflicts.
Trusts & Estates magazine is pleased to present the monthly Technology Review by Donald H. Kelley—a respected connoisseur of the software and Internet resources wealth management advisors use to further their practices.
Kelley is a lawyer living in Highlands Ranch, Colo., and is of counsel to the law firm of Kelley, Scritsmier & Byrne, P.C. of North Platte, Neb. He is the co-author of the Intuitive Estate Planner Software, (Thomson – West 2004). He has served on the governing boards of the American Bar Association Real Property Probate and Trust Section and the American College of Tax Counsel. He is a past regent, and past chair of the Committee on Technology in the Practice, of the American College of Trust and Estate Counsel.
Trusts & Estates has asked Kelley to provide his unvarnished opinions on the tech resources available in the practice today. His columns are edited for readability only. Send feedback and suggestions for articles directly to him at email@example.com.