Family-owned businesses face distinctive challenges when it comes to succession planning or business inheritance. For example, it’s important to address the distinction between ownership succession and management succession.

When a non-family business is sold to a third party, ownership and management succession typically happen simultaneously. However, in the context of a family owned business, there may be reasons to separate the two.

Retaining Control

From an estate planning perspective, transferring ownership of assets to the younger generation as early as possible allows you to remove future appreciation from your estate, thereby minimizing estate taxes. Proactive estate planning may be especially relevant today. This is especially true from the federal estate and gift tax changes under the Tax Cuts and Jobs Act.

For 2023, the unified federal estate and gift tax exemption will be $12.92 million. For married couple it will effectively be $25.84 million. That’s generous by historical standards. In 2026, the exemption is set to fall to about $6 million, or $12 million for married couples, after inflation adjustments: unless Congress acts to change the law.

However, when it comes to transferring ownership of a family business, older generations may not be ready to hand over the reins — or they may feel that their children aren’t yet ready to take over. Another reason to separate ownership and management succession is to deal with family members with no company involvement. Providing heirs outside the business with equity interests that don’t confer control may be an effective way to share the wealth.

Possible Solutions

Several tools may allow you to transfer family business interests without immediately giving up control, including:

• Trusts.
• Family limited partnerships.
• Nonvoting stock.
• Employee stock ownership plans (ESOPs).

Owners of smaller family businesses may perceive ESOPs as a complex tool, reserved primarily for large public companies. However, an ESOP can be an effective way to transfer stock to family members who work in the company and other employees, while allowing the owners to cash out some of their equity in the business.

Owners can use this newfound liquidity to:

• Fund their retirements.
• Diversify their portfolios.
• Provide for family members with no involvement in the business.

If an ESOP is structured properly, an owner can maintain control over the business for an extended period. This is still applicable even if the ESOP acquires a majority of the company’s stock.

Conflicting Needs

When it comes to succession planning, older and younger generations of a family business may have conflicting objectives and financial needs. If any of the business inheritance strategies mentioned here interest you, or you’d like to discuss other aspects of succession planning, please contact us.