Harnessing the energy and ambition that tends to surface at the start of a new year, now may be a good time to consider your personal estate and business succession planning.
Developing a plan for the future of your winery or vineyard helps to ensure stability for your business and its stakeholders in the event of your death or incapacity and increases the odds of your business achieving its full potential over the long term.
The strategic objectives of a business succession plan are typically memorialized and set in motion through legal agreements. For example, a shareholder agreement can establish a framework for the transfer of ownership within the family and restrict the sale of business interests to nonfamily members. A family trust can distribute a family business in a manner that is practical and fair in the eyes of the business owner, perhaps bequeathing a controlling interest in the business to those who are positioned to lead and leaving other estate assets to the other beneficiaries.Estate-Grown
With enough lead time, it can be possible to eliminate estate tax, or at least to minimize and defer the payment of such tax. With the estate-tax rate a significant 40 percent, this can make all the difference in allowing a business to remain family-owned, for example, or giving the family the freedom to decide whether management should be vested in the next generation or outside managers.
Under current law, U.S. persons have a combined gift and estate tax exemption of $11.4 million, but decreasing to $5 million, annually indexed for inflation, at the end of 2025, absent a change in law. Depending on your circumstances, you might consider using some of your exemption during your lifetime to gift all or a portion of your business to your successors or trusts for their benefit, lending funds to the next generation to help them acquire the company, or some combination. There are ways to retain control or remain involved in management while transferring economic rights to achieve estate tax savings.Trust In Your Gifts
One benefit of transferring business assets now is that future appreciation will be removed from the transferor’s estate. For example, if you fund a trust with high growth assets worth $11 million and those assets appreciate to $16 million at your death, you will have effectively shifted an extra $5 million to your family free of gift and estate tax.
With lifetime gifts, you forgo a step-up in basis of the transferred assets upon the transferor’s death, which step-up could otherwise reduce or eliminate capital gains exposure on a subsequent sale of those assets. This is not of consequence, however, if the assets are not intended to be sold.
One estate planning technique which magnifies the benefits of lifetime gifting is selling assets to a grantor trust in exchange for a promissory note. A “grantor trust” essentially means that the transferor continues to be treated as owner of the trust assets for income tax purposes. As a result of this status, there are no adverse income tax consequences to the sale transaction.
In the usual case, the transferor sells an asset at its fair market value to a trust in exchange for a promissory note that is either self-amortizing or, if the cash flow is not sufficient to amortize, interest only and a balloon payment of principal due at the end of the term. Assets that are either depressed in value or are expected to appreciate substantially should be selected for this purpose.
The goal is to remove future asset appreciation, above the mandated interest rate, from the transferor’s estate. Fractional interest discounts may be available to make this technique even more effective at wealth transfer.Team Effort
The legal and tax aspects of business succession are but pieces to the overall puzzle of how to position your family business to thrive even in your absence. A team approach is recommended, bringing together a group of professional advisers with the necessary qualifications and skill sets to facilitate the process of working through both family and succession plan issues.Putting Down Deep Roots
If a family business is transferred to the next generation without a formal succession plan in place, family members may be ill-equipped to lead; siblings may squabble over the direction of the company; the business may not have enough liquidity to remain family-owned; and the successors could end up selling the business below its optimized value. By engaging in estate and succession planning today, you can set expectations, facilitate a smooth transition and maintain the legacy of your family business.Lauren Galbraith is a senior associate in Farella Braun + Martel’s St. Helena office, where she focuses on complex trust and estate matters and transition planning for families with closely held businesses and real property holdings. She can be reached at email@example.com.