By Lauren Galbraith
Wineries and vineyards are unique assets to consider when crafting personal financial, estate and business succession plans for clients, both of which are crucial components of wealth management.
There is often a significant amount of goodwill tied to a family’s name, meaning that planning for the future of a business operation is more than optimizing physical assets and understanding sales contracts: It is about carefully cultivated grapes, production techniques and traditions, all coming together to make a product that continues to live up to its hard-earned reputation.
The energy and ambition that tends to surface near the start of a new year makes now a good time to touch base with clients in the wine space, asking that they consider establishing or updating their personal estate and business succession plans. The guiding principle at play is simple: Developing a plan for the future of a winery or vineyard helps to ensure stability for the business and its stakeholders upon a death or in the event of incapacity and increases the odds of the business achieving its full potential over the long term. From an emotional standpoint, this is about ensuring that the great wine of today continues to be produced and poured well into the future.
The strategic objectives of a business succession plan are typically memorialized and set in motion through legal agreements. For example, a shareholder agreement can establish a framework for the transfer of ownership within the family and restrict the sale of business interests to nonfamily members. A family trust can distribute a family business in a manner that is practical and fair in the eyes of the business owner, perhaps bequeathing a controlling interest in the business to those who are positioned to lead and leaving other estate assets to the other beneficiaries.
With enough lead time, it can be possible to eliminate estate tax, or at least to minimize and defer the payment of such tax. With the estate tax rate a significant 40 percent, this can make all the difference in allowing a business to remain family-owned, for example, or giving the family the freedom to decide whether management should be vested in the next generation or outside managers.
Under current law, U.S. persons have a combined gift and estate tax exemption of $11.4 million, but decreasing to $5 million, annually indexed for inflation, at the end of 2025 absent a change in law. Your clients, depending on their circumstances, might consider using some of their exemption during their lifetime to gift all or a portion of their business to their successors or trusts for their benefit, lending funds to the next generation to help them acquire the company or some combination. Of importance, there are ways to retain control or remain involved in management while transferring economic rights to achieve estate tax savings.
One benefit of transferring business assets today is that future appreciation will be removed from a transferor’s estate. For example, if a person funds a trust with high growth assets worth $11 million and those assets appreciate to $16 million at his or her death, that person will have effectively shifted an extra $5 million to his or her beneficiaries free of gift and estate tax.
With lifetime gifts, one forgoes a step-up in basis of the transferred assets upon the transferor’s death, which step-up could otherwise reduce or eliminate capital gains exposure on a subsequent sale of those assets. This is not of consequence, however, if the assets are not intended to be sold.
One estate-planning technique that magnifies the benefits of lifetime gifting is selling assets to a grantor trust in exchange for a promissory note. A “grantor trust” essentially means that the transferor continues to be treated as owner of the trust assets for income tax purposes. As a result of this status, there are no adverse income tax consequences to the sale transaction. In the usual case, the transferor sells an asset at its fair market value to a trust in exchange for a note that is either self-amortizing or, if the cash flow is not sufficient to amortize, interest only and a balloon payment of principal due at the end of the term. Assets that are either depressed in value or are expected to appreciate substantially should be selected for this purpose. The goal is to remove future asset appreciation, above the mandated interest rate, from the transferor’s estate. Fractional interest discounts may be available to make this technique even more effective at wealth transfer.
Forgoing succession planning can lead to calamity, or at least negative consequences. For instance, if a family business is transferred to the next generation without a succession plan in place, family members may be ill-equipped to lead; siblings may squabble over the direction of the company; the business may not have enough liquidity to remain family-owned; and the successors could end up selling the business below its optimized value.
As business, financial and health conditions can change rapidly, keeping succession planning and execution top of mind is critical. Far from morbid, anticipating personal and business life changes provides peace of mind and helps answer the critical question, “Who will take care of this winery or vineyard once I am no longer able?”
The legal and tax aspects of business succession are key complementary pieces to the overall financial-planning puzzle of how to help a client position their family business to thrive even in their absence. By engaging in estate and succession planning today—ideally in concert with legal counsel—wealth management professionals can better set expectations, facilitate smooth transitions and maintain the legacy of their family business clients. Viewing wealth management as a continuum, succession planning is a process that, much like the grapes themselves, requires patience and routine tending.
Lauren Galbraith is a senior associate in Farella Braun + Martel’s St. Helena, Calif., office, where she focuses on complex trust and estate matters and transition planning for families with closely held businesses and real property holdings. She can be reached at [email protected].
