Among the chief goals of succession planning is providing continuity of management, in addition to minimizing the tax costs of transferring property interests to new generations, according to Bruce W. Tigani, attorney and chair of the tax, estates and business practice group at Morris James, a law firm based in Wilmington, Del.

“Succession planning ensures the business has the capability of continuing profitability in case something happens to the owner or in case of death,” says Todd Hoppe, attorney and co-practice group leader of the business and corporate practice group at Grand Rapids, Mich.-based business law firm Foster Swift.

Succession planning can be done in stages over many years or handled all at once. In either case, the goal is often to limit the cumulative transfers during the lifetime of the parents to a minority interest, say 40-45 percent, according to Tigani.

Clients may give gifts of interests in their businesses or properties to children during their lives, either outright or through trusts, Hoppe explains. As parents increase the percentage of the business their children own, their estate tax at time of death lowers, since it is based on their remaining ownership interest.

When done in stages, the process usually tends toward an annual giving “program” of percentage interests in the entity holding the property valued at annual gift tax exclusion limits (currently $14,000 per donor to donee), so the gifts do not create a gift tax impact. Since each parent has an annual exclusion to use for the benefit of gifting to each of their children (and grandchildren), parents can combine for $28,000 of annual gifting to each child and the benefits can add up quickly without sacrificing other tax exclusions that do not renew each year.  As the children get trained to run the business, the ownership interest can be increased to grow with their involvement.

The Foster Swift firm is seeing more and more family firms starting the succession planning process earlier and approaching the idea of how to pass on assets in a more formal fashion, according to Hoppe.

“The earlier you start, the better. There is more flexibility in implementing the plan and more opportunity to plan for tax issues,” he says.

In anticipation of the election, some family firms have gotten more aggressive last year, taking advantage of existing gift tax exemptions and valuation discounts by using all of their $5.5 million exemption at once, Tigani says. “The motivation was to pull as much value and appreciation out of their estates and give more to their children while the current limits were in place. They did this in advance of the new administration, as they were feeling uneasy and unsure of future tax law changes,” he notes.

Historically, family firms and the properties held by them were structured as limited partnerships (LP), Tigani notes.

“But with the advent of the limited liability company (LLC) and its widespread acceptance under both state law and federal tax law, for the last 15 years or so we are now seeing the LLC as the primary vehicle of choice—often having properties in separate LLCs to isolate risk.”

LLC entity protections cover against spousal claims and creditor claims. It is a way to effectively shield the underlying property from creditors. Part of LLC protection is that in many jurisdictions, it restricts creditors by forcing them to take a trip to court to obtain a charging order. “In most cases, that result is not optimal for creditor collection and they choose to purse some other avenue rather than deal with that,” Tigani says. 

Owning a property goes beyond simply buying it. An investor must also figure out how the property will be managed.

“We advise our HNW clients that if they want to maximize the investment potential of the property, they are going to have to be thoughtful and deliberate in their management of that property and decide whether they will be adding substantial value or just sustaining a baseline condition,” Thomson says.

Key to this is ensuring that a well-qualified management team is in place, Sica says. He recommends asking these questions about a team that’s already managing a property or one that’s going to be tapped for that job:

·         Are the team members organized, proactive and responsive?

·         Will tenants be satisfied with how they deal with maintenance issues and emergencies?

·         Have they properly budgeted to guarantee healthy cash flow?

“Tenants make choices about whether they want to stay,” Sica says. “When they do, they help make the project viable… . If they are unhappy, they walk away, and a great property can be abandoned.”

The assets owned by an individual at the time of his or her death are subject to federal and state gift and estate taxes, Hoppe says. But there is a federal tax exclusion amount on these taxes. Although it is nominally $5 million, that figure is adjusted annually for inflation. For 2016, the figure was $5.45 million in assets per business owner.  In 2017, it will inch upward to $5.49 million.

So a married couple can theoretically pass almost $11 million worth of assets to their children that are not subject to federal inheritance tax, according to Hoppe.

“With good succession planning, heirs can avoid having to sell off parts of the business to pay inheritance tax,” Hoppe says.

“Don’t forget that succession planning is subject to statutory and regulatory changes, so family firms have to keep an eye on that,” Tigani notes. If the family is too busy managing the day-to-day operations of the business, it may be wise to retain a lawyer to watch for ongoing regulation changes as they arise.

Succession planning is an area the IRS has hammered away at for years, arguing that it is just a tax avoidance technique, according to Tigani. In fact, there was a hearing at the D.C. Treasury on December 1 on a new rule that would do away with valuation discounts in succession planning. The measure has not yet been approved.

“There was significant opposition voiced by attorneys’ groups, CPAs and valuation experts, as well as business owners themselves, and we will know more as we enter 2017 whether Treasury and the IRS will heed the testimony and temper their approach to the problem as they perceive it,” Tigani says.

With a Trump administration in the White House, it now appears less likely that stricter rules on limiting discounts on family transactions would be adapted, according to Hoppe.

“Conventional wisdom among practitioners now sees President-elect Trump’s administration as not as aggressive in this area,” Tigani adds.