Many of the law firm’s estate planning clients in Riverside, San Bernardino, San Diego, Orange, and Los Angeles County are business owners or manage a large portfolio of residential and commercial rental real estate.
Business Succession Planning
A recent Forbes article referred to the fact that less than one-third of family businesses survive the transition from first generation to second-generation ownership. Of those, only half (one-sixth of the original number) survive the transition to the third generation. Business succession planning is a key part of the estate plan of any businessperson who desires to preserve the family business.
One of the main reasons for the high failure rate of businesses transitioning from one generation to the next is a lack of liquidity. Sufficient cash or liquid assets may be needed to hire employees to fill the void left by the deceased family member and to weather a rocky transition period. Also, cash may be needed to pay family members who are not participating in business their share of the estate. Keeping family members who don’t participate in the business on as “silent partners” is usually not a good arrangement. This is true because it can be relatively easy for the family members in management roles of the business to manipulate profits to reduce distributions to non-working family members. In addition, non-participating family members can distract those family members actually working the business by constantly asking for profit and loss statements, questioning why capital expenditures may to be made, objecting to salary increases to family members, and demanding distributions from the business. Life insurance and key man insurance are two products that can often create liquidity at the death of a family member.
As a business owner in Southern California, I may have a wonderful working relationship with my business partner. However, upon my partner’s death or disability, I may not have that same relationship with my partner’s spouse. A properly funded buy-sell agreement combined with a life insurance trust could be the perfect vehicle to make an income tax-free payment to the partner’s spouse in exchange for his or her share of the business, leaving the other partners free to continue to run the business with interference. Where a purchase of the business will be paid overtime, the methodology of how the purchase price would be determined and how the payments will be made can be part of the structure of the Buy-Sell Agreement.
Don’t Forget the IRS
Don’t forget that the taxman can be an unwanted partner to your business agreement and disastrous results may occur where the tax code is not considered. In one situation, the Buy-Sell Agreement specified that the business was to be sold for a bargain price to the spouse of the first partner to die. What the partners failed to consider is that the IRS may not agree that the bargain sale price reflects the true value of the business. Here, the IRS valued the business at about four times greater than the amount in the Buy-Sell Agreement and the spouse of the deceased business partner used the purchase proceeds to pay the estate tax on the value of the business. Thus, the only parties who benefitted were the surviving partner, who got the business for a bargain price, and the IRS. Don’t let that happen to you or your family members. Consult with a qualified estate planning attorney family with the tax laws and proper business succession techniques.
Contact a Southern California Business Succession Planning Attorney Today
As a business owner, you undoubtedly understand the need for contingency planning. Including a business succession planning component in your overall estate plan is the best way to ensure that your interest in the business will be safeguarded in the event of your death or disability. Whether your goal is to keep the business in the family or to ensure your loved ones receive a fair price for the sale of your ownership interest, our experienced and knowledgeable business succession attorneys can help.
Visit One of Our Southern California Locations
With office locations throughout Southern California, Sandoval Legacy Group, a Division of Holstrom, Block & Parke, offers representation for Estate Planning, Special Needs Planning, Trust Administration, Probate, and Conservatorships in Riverside, San Bernardino, Orange, San Diego, and Los Angeles County.