Module Overview

For most small business owners, a closely held business interest represents their estate’s single greatest asset — and most challenging aspect of their estate plan. Family businesses can be living legacies, passed from one generation to another. These businesses often embody the founder’s dreams and aspirations; succeeding generations rely on them for their livelihoods and sense of purpose.

Yet for all of the personal considerations, the owner must carefully examine the financial aspects of the business. Failing to address these issues carefully and honestly can create severe problems for the business owner’s heirs.

35%
of privately held businesses pass successfully from the first to second generation
<10%
make it to the third generation
9 mo.
to pay federal estate taxes — often on the business’s illiquid value

In the face of these odds, careful, detailed planning is critical. This module explores the special problems faced by small business owners when planning their estates.

Goals of Estate Planning for Business Owners

Closely held businesses differ greatly from their larger, publicly held counterparts. Family businesses exist in a synergistic relationship with their owners — the business is often the owner’s major source of income and single largest component of family wealth, while the business’s continued success depends on the unique talents and skills of the owner. Inevitably, the owner’s participation will end. Careful planning must address four fundamental goals:

1 — Adequate Income for Survivors
Can the business continue without the owner’s active participation? Can it generate sufficient income for the owner’s heirs? In retirement, can the business afford to provide a sufficient income to the retired owner? Assuring that survivors have adequate income after the owner’s death is the first and most fundamental planning goal.
2 — Business Continuity at Maximum Value
The death of an owner can easily depress the value of a closely held business. Unlike publicly traded firms, a small business relies on the unique, irreplaceable talents of its owner. Do the heirs possess the skills and desire to operate the business successfully? Would they be better served by selling to an outsider? Is family wealth better preserved by liquidating the assets? These questions require honest soul-searching.
3 — Minimize Transfer Costs
The major financial burden of a business transfer is the tax liability: gift tax if transferred during the owner’s lifetime, estate taxes on postmortem transfers, and possible capital gains taxes on liquidation. There are also personal costs: Is the owner willing to relinquish control during their lifetime? What are the repercussions within the family if the business is left to only one member?
4 — Adequate Liquidity
The family business may be the largest asset in the estate and a major driver of estate tax liability — yet it is rarely a source of liquidity. Business cash flow is typically reinvested in operations. Unlike publicly traded stock, closely held interests are highly illiquid at death: prospects for continuation are uncertain, valuation is difficult, finding the right buyer is not easy, and lenders hesitate during transitions. Estate taxes are due within nine months — on the business’s full value plus all other estate assets.
Summary — Business Estate Planning Objectives
  • Provide adequate income for survivors
  • Maximize the value transferred to survivors
  • Minimize the costs of transfer
  • Ensure adequate liquidity to provide a smooth transition for the business and heirs

The need for carefully planned estates is paramount for the small business owner. Without a plan for the inevitable transfer of ownership, the business’s value dissipates quickly — leaving nothing but headaches for the beneficiaries.

Module 4 Pages

Page 2 — Forms of Business Ownership→ Page 3 — Role of the Owner→ Page 4 — Business Valuation→ Page 5 — Keep / Sell / Liquidate?→ Page 6 — Buy-Sell Agreements→ Page 7 — Family Lifetime Transfers→ Page 8 — Transfers to Outsiders→ Page 9 — Estate Tax Considerations→ Module 4 Review Quiz→
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