The Ins and Outs of Business Succession and Estate Planning for Closely-Held Businesses

This article was original published on December 7, 2020 and was updated on October 20, 2021.

Like humans, businesses have a life cycle.  And, just like us, major focus is put on the beginning and middle stages of the life cycle, with many people putting off late stage planning until it is too late. Clients often put off estate planning because they do not want to think about it. Similarly, clients also often put off planning for the later stages of their business life cycle because they just cannot fathom their business ending.

Unfortunately, although for many business owners there may be no end in sight and they think their businesses will continue with their leadership into eternity, the statistics speak differently:  70% of family businesses fail during the first generation and a further 20% (total of 90%) fail while the second generation is in leadership roles. When clients who own closely-held businesses do not plan for next steps of the business in the business life cycle, whether it be a change in leadership or a sale, they lose out on solid tax planning, such as gifts and sales to intentionally defective grantor trusts, and have increased uncertainty on the next steps.

When thinking of estate planning for business owners, it is helpful to think of a fork in a road—although, the fork we might think of here has many prongs. The family is travelling down the road until some event occurs and they have to decide how to proceed. The event could happen suddenly, as in the death of the head of the family who is the sole owner, or it could be an event on the horizon, like a letter of intent offering to explore purchasing the company.

The reality is that no business can continue in perpetuity with the same ownership and leadership. When we counsel business owners, our job is to help them navigate through these life cycle events. When business owners spend years building their business—including loss of sleep and lots of sweat-equity – this process can be emotionally grueling. To help guide the process, these are some key questions to be addressed:

• What non-tax considerations are involved?
• Should the current owner(s) transfer some of their interest prior to death?
• How should ownership be determined after death?
• Who should lead the company?
• What the best interests of the family? And the best interests of the company? Are they aligned?
• Are any life insurance considerations involved?
• Is the business in growth mode? If so, what advance planning options should be used?
• How can the business succession and estate planning goals be achieved?

The Trusts & Estates Group at Levenfeld Pearlstein represents several closely-held businesses, and we can help guide clients through these complicated issues.