Family Business Succcession Planning

family-business-succession-planning-checklistBy Brandon E. Crooks, Principal at Counsel Trust Company

There are over 5.5 million family businesses in the US with an average life span of 24 years (, 2010). About 40% of family-owned businesses turn into second-generation businesses; approximately 13% are passed down successfully to a third generation, and 3% to a fourth generation or beyond (, 2010). Business owners are attractive clients due to the amount of wealth that lies within family-owned businesses.

The challenge for advisors working with this group is that the business succession risks are greater than ever because nearly a third of owners have no estate plan (beyond a simple will). Further complications can occur when a client transitions a company to an heir who is active in the business, while maintaining proportionate distributions to others who are not. Passing the family business from one generation to the next is one of today’s most challenging estate planning problems. Naturally your clients want to make sure their company stays intact, that it can be passed seamlessly to heirs in a timely manner and that it is subject to a minimum amount of estate tax and other estate settlement costs. Creating a trust may help your client accomplish these goals. Passing the family business to the next generation with minimum taxes and other estate settlement costs requires planning and the assistance of an experienced estate planning attorney. One option is to place the family business (whether in sole proprietorship, partnership or stock form) into a revocable trust designating the business owner as grantor and trustee. The grantor funds the trust with business assets, and as trustee, retains control over the assets. Upon certain events (such as death or disability of the owner), the trust distributes the assets to the heirs. The business owner can also determine other distribution triggering event(s) such as an heir reaching a certain age or obtaining certain goals. The business owner also determines who controls the trust after their death by naming alternate trustees. Two distinct advantages of a trust include avoiding the cost of probate (as high as 10% in some states) and avoiding delays in the transfer and control of business assets to heirs. Another advantage of a trust is that if members of the next generation are too young or inexperienced to take on the responsibility of running a business, the power to control the business assets can be given to a trustee until the heirs are a certain age and experienced enough to take control.

There are also tax advantages of placing a family business into a trust. Estate taxes can be mitigated by employing certain planning techniques. Irrevocable trusts are often used in an asset ‘freeze’. Business assets placed in an irrevocable trust can shelter appreciation from estate taxes. For example, if you were to create an irrevocable trust with privately held shares of $5.2 million (the current estate / gift lifetime tax exemption) and the trust assets grow to $6.2 million, the $1 million appreciation is estate tax free (along with the initial $5.2 million lifetime exempted gift). This technique is especially effective when healthy future growth of a business is expected. A gift of $5.2 million into an irrevocable trust now can keep future appreciation out of a taxable estate.

Another tool to consider is the Family Limited Partnership. The partnership is created by the business owners who make a gift of the business interest to the partnership while retaining control over the business. The other members of the trust, as limited partners, now have an interest in the business and income is divided proportionally. This form of partnership can have significant estate tax benefits because the transfer of assets reduces the size of the business owner’s taxable estate. It is also a way to solve the problem of giving a child who is active in the business more ownership and control while providing income for other non-working children.

These techniques are only some of the ways to plan for the transfer of family owned business. A competent estate planning attorney should always be retained in order to determine what tools will help ensure the continued success of your client’s family owned business.

Here is a helpful checklist of 10 questions to ask your clients to start assessing their situation and their needs:

  1. If you die unexpectedly, can your family continue to run your business? If your family cannot run your business, who can?
  2. If you die unexpectedly, will your family have sufficient liquid resources to hire someone to replace you?
    If your family cannot run your business without you, you should consider their liquidity needs. If there is no money to hire someone to run the business, perhaps life insurance is needed.
  3. If you die unexpectedly, and have partners, will they pay your family a fair price for your business?
  4. How do you protect your family in the event of your early death?
    The most effective form of protection for your family, or you, if you survive to retirement, is a well prepared buy sell agreement.
  5. Do you have a management succession plan in place?
  6. Does your succession plan accommodate siblings/children with different skill levels or interest in the business?
  7. Have you considered the impact of estate taxes on your family business?
  8. Have planned the transfer of your family business to your heirs?
  9. Are you willing to make gifts of interests in the family business to your children, or trusts for their benefit, if you can maintain management control?
  10. Are you and your spouse in agreement as to the ultimate disposition of the family business?


brandon-crooks-counsel-trust-groupBrandon E. Crooks is a Principal at Counsel Trust Group and provides investment management and consulting services for businesses, retirement plans, and high net worth individuals.  He previously served as Assistant Vice President at Bank of America in the Corporate Investments Group of the corporate bank and served as an Analyst and Associate at Banc of America Securities, LLC in the Global Structured Products Group of the investment bank.  He graduated Magna Cum Laude from Virginia Tech with a Bachelor of Science in finance in 2004.  For a list of questions to ask your clients to determine their need for a trust contact Brandon at or at (717)718-1601


Image courtesy of photostock /

Leave a Comment