Estate Planning Considerations for Family-Owned Businesses
Family-owned businesses often serve as a functional way to preserve generational wealth and provide financial security for your beneficiaries. However, without the right business transition provisions in your estate plan, your business longevity could suffer, and your beneficiaries could be vulnerable to estate taxes, capital gains taxes, and ownership disputes.
Establishing specific estate planning protections for your family-owned business is not just about minimizing tax burdens. It also involves strategies to separate ownership, manage the business’s daily operations, and address the business’s value.
At Zapolis and Associates PC, our attorneys help family-run business owners draft effective estate plans that protect their business and provide for loved ones and beneficiaries after they retire or pass away.
Located in Mokena, Illinois, we serve clients throughout the Chicagoland area, including Will County, Kankakee County, and Cook County. Contact us today to schedule a consultation.
The Importance of Business Planning
Planning for what happens to your family-owned business is an essential part of an effective estate plan, and what you include (or don’t include) will affect everyone with an ownership stake in your business. The goal is to make sure your business continues operating without interruption, minimize tax burdens where possible, and reduce the likelihood of family disputes over ownership or leadership positions.
Key Estate Planning Considerations for Family-Owned Businesses
If you own a family business in Illinois, setting up an estate plan for your business is an essential part of maintaining family control and preserving your business interests and market share. While the specific documents you should create may vary depending on the size and scale of your business, the primary considerations you should explore include the following.
Succession Planning
Succession planning refers to strategically determining who will inherit, manage, and run the business if you retire or pass away. When developing a strong succession plan, specifically name new leaders who will handle day-to-day business operations and establish provisions for how equity, shares, and business assets will be divided or maintained.
When planning for successions, it’s important to separate who owns the business from who controls the daily operations. In some businesses, this could be the same person. However, in larger businesses or corporations with multiple shareholders, these roles may be granted to different individuals. Some options you can consider when building a succession plan include:
Non-voting stock: Allocating non-voting stock provides individuals with an ownership share without granting them a say in business decisions.
Family limited partnerships (FLP): An FLP can allow your immediate family to retain ownership and control of a business. This is a commonly used tool for passing business property and wealth to younger generations while maintaining family control of your business.
The goal of an effective succession plan is to keep the business running smoothly during leadership changes, prevent family disputes, and maintain the values, mission, and value of the company for future generations.
Business Valuation & Appraisals
Cementing an accurate valuation of your business is essential to prevent unexpected audits and unnecessary tax burdens. When conducting a valuation for your business, there are a few approaches you can take:
Income-based approach: This approach appraises your business value based on its capital, cash flow, earning capacity, and potential risk.
Market-based approach: This approach appraises your business value by comparing your business to the value and recent industry transactions of other businesses in your chosen market.
Asset-based approach: This approach appraises your business value by assessing its assets and liabilities (e.g., debts).
Professional appraisals can replace informal estimates and help satisfy the disclosure rules set by the IRS. For additional guidance on valuation and appraisals, contact our experienced Illinois estate planning attorneys.
Estate Tax Planning Strategies
A key part of your estate plan should encompass estate tax planning, especially when you own a family business. Under the federal annual gift tax exclusion, you can transfer up to $19,000 worth of cash, assets, or property per person tax-free every year.
Under the federal gift and estate tax exemption, you can transfer up to $15 million of your estate tax-free to your beneficiaries and heirs as part of your estate plan. Any part of your estate transferred over this federal threshold will incur a 40% tax rate.
Following these federal standards can significantly reduce the tax burden on your family or business after you pass away. Consider also exploring advanced trusts, such as Grantor Retained Annuity Trusts, to pass high-appreciation assets like business real estate and interests without incurring gift taxes.
Buy-Sell Agreements
Consider implementing a buy-sell agreement in your business estate plan. These agreements allow you to set specific procedures for when and how your business will be sold or passed on, such as if you retire, become incapacitated, or pass away.
A well-structured agreement also immediately creates liquidity for your heirs, providing heirs without a say in business decisions with a cash inheritance instead of illiquid stock. If you meet IRC Sec. 2703, you may also be able to freeze the value of your business for federal estate tax purposes.
Contact Our Experienced Estate Planning Attorneys in Mokena, Illinois
If you run a family-owned business, whether a small mom-and-pop shop or a larger corporation, the provisions you establish in your estate plan can significantly impact ownership transfers, valuation, and tax obligations for your estate and heirs.
At Zapolis and Associates PC, our attorneys, Robert J. Zapolis and Briane E. Eggert, have years of combined experience helping family business owners establish effective estate plans and implement strategies that can help maintain family control, promote a smooth transfer of ownership, and reduce transfer tax burdens.
Located in Mokena, Illinois, we serve clients throughout the Chicagoland area, including Will County, Kankakee County, and Cook County. Contact us today to schedule a consultation and explore your estate planning options.
