We are often called upon to counsel our clients in connection with their desire to keep a business within their family and to provide an opportunity for the next generation to carry forward and expand the business. The first challenge facing us is how to minimize the federal estate tax burden since the business is not a liquid asset and the client does not want to sell it in order to generate cash needed to pay estate taxes.

With regard to minimizing taxes, it is important to try to reduce the value of the business in the client’s estate at the earliest possible time. For example, if we have an estate planning client whose business is worth $5,000,000, we want to do the planning now rather than have the client return in five years when perhaps the business may be worth $10,000,000. Gifts of minority interests in a business can be made to a child or children who are active in the business, and we can obtain a discount on the value of the gift because of the fact that the child or children will not have any control over the business and there is no market for selling an interest in the business. Usually the discount will be in the 35% to 45% range. It is important for us to work with qualified appraisers in connection with substantiating the value of the gift.

Some clients believe that you can gift only $12,000 per person during any calendar year and are not aware that you can gift up to $1,000,000 during your lifetime. The latter gift will be deducted from the amount that can pass free of estate taxes when you die.

In connection with succession planning, we often recommend a recapitalization of the business to create voting and non-voting interests. This permits the parents to keep all of the voting control while making gifts of the non-voting interests. A substantial amount of the equity of a business can be removed from the parents’ estate by use of this mechanism.

When lifetime gifts of business interests are made, it is important to have a Buy-Sell Agreement, which will set forth the provisions regarding disposition of the interests held by the parents at death, i.e., that the child or children in the business will either have an option or be required to purchase the interests of the parents. If gifts have been made to a child or children who are not active in the business, the Buy-Sell Agreement can set forth the obligation of a child who is active in the business to acquire an interest from a non-active child.

We generally work with the client’s accountants, insurance agents and other financial advisors in order to build a team that can provide the client with the best options for keeping the business in the family. Many businesses are not successfully kept in the family due to a lack of proper planning.

Louis Jay Ulman is a Senior Partner in the firm’s Estates & Asset Protection Group. Mr. Ulman’s practice centers on estate planning and elder law, including experience with families with disabled children, small business owners, asset protection, and charitable giving. He can be reached by phone at 301.575.0354 and by email at lulman@offitkurman.com

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In connection with succession planning, in many instances not all of the children will become active in the business during the lifetime of the parents nor want to have an active role after the parents are deceased. It may therefore make sense that only the active child or children are gifted stock during lifetime or left the business interests at death. However, most clients want to treat their children either "fairly" or "equally." The challenge is that from the financial perspective, "equal" is not always "fair," nor is it always in the best interests of the business, the family or the parties involved. How to achieve a truly equitable asset distribution should be part of the discussion concerning business succession.

The client should consider, for example, a child’s role in helping develop the business. Was it a new business where the child worked long hours without proper compensation? Perhaps when the child joined the business, it was worth $3,000,000 and the child was a major factor in increasing the value to $6,000,000. Other factors that should be taken into account in determining how to treat children include age and experience, motivation to be active in the business, adult life circumstances of each child and prior gifts and asset transfers that have been made.

It is not required that children be treated equally under a Will or Trust. Unequal distribution can be made or another, non-business related asset (e.g. real estate, stocks, retirement accounts) can be specifically distributed to a child to balance the transfer of the business to another child. Often the use of life insurance will "level the playing field" and satisfy the client’s need to have an appropriate inheritance for children who are not involved in the business as well as provide liquidity to pay taxes.

Achieving equitable distribution among family members can be accomplished in a number of ways. The key is, above all, advance planning that objectively balances each child’s situation with the goals for the company. Parents can then feel comfortable that they have treated their children fairly, minimized the potential for conflict and provided an arrangement that will promote family harmony and future business success.

Stanley J. Neuhauser is a Partner in the firm’s Estates & Asset Protection Group. Mr. Neuhauser has expertise in the areas of real estate and estates and trusts. He can be reached by phone at 301.575.0362 and by email at sneuhauser@offitkurman.com

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