For many of our clients, their most valuable asset is the family business they built over decades of hard work. We often find, however, that even if those clients maintain an estate plan that directs the disposition of their other possessions, most of them have failed to implement a business succession plan, leaving the family business imperiled when they die.

The adverse consequences of not focusing on succession can be catastrophic. After all, less than one third of family businesses survive the transition from first to second generation[1]. Moreover, the necessity of early planning cannot be overstated. Effective business succession strategies develop and are over time, supporting the next generation as they learn how to run the business. Accordingly, we find that succession plans often succeed when owners transfer economic value but retain managerial control over an extended period of time. The longer a business has to implement a succession plan, the smoother and more successful the transition will likely be.

Planning ahead is more than just sound business practice. A comprehensive, long-term business succession plan can also produce significant tax savings for intra-family transfers. For example, gifting interests over a number of years can take advantage of the annual gift tax exclusion amount. In addition, equity transfers can be structured to create substantial valuation discounts, reducing tax obligations.

Each day an owner puts off business succession planning, the probability that the business can employ these fundamental business succession strategies diminishes. Indeed, in 2016 the Treasury proposed regulations that would significantly reduce or eliminate valuation discounts for family-owned business equity transfers. Fortunately, the current administration is unlikely to enact those regulations, and valuation discounts should remain a viable succession planning strategy for the immediate future. The Treasury and the IRS have long sought comparable legislative and regulatory action, however, and eventually similar regulations may take effect.

Our Business and Corporate attorneys collaborate with our firm’s Tax Planning Practice Group to structure efficient, tax-effective business succession plans that integrate family dynamics with innovative management transitions. For more information on this Client Update, please contact Jeffrey B. Cianciolo, Esq. or Marcus I. Howell, Esq.