Estate planning with a business in mind

By Brian Carter, CPA, Mauldin & Jenkins

A family business can be a wonderful asset that not only supports multiple family members but also helps keep the various generations connected. Unfortunately, the same business can complicate estate administration and wreak financial, and emotional, havoc on heirs. To avoid that outcome, it is critical that business owners clarify their goals for the business after they pass and formulate an effective, and fully implementable, estate plan to achieve their objectives.

Estate taxes and liquidity concerns

Very small family businesses are often valued below the estate tax threshold ($12.92 million in 2023), while others that meet the IRS definition of a Qualified Family-Owned Business Interest may be eligible for an estate tax exemption. For other closely held businesses, estate taxes are an important consideration as the business often constitutes the bulk of the estate’s total value. Having a large part of the estate in the form of an illiquid asset can complicate estate administration, leading to an unanticipated cash crunch.

Section 6166 of the Internal Revenue Code can provide a solution to the problem, in some cases. Under this provision, if a closely held business exceeds 35% of the adjusted gross estate value and meets other requirements, the estate can elect to pay the tax in installments over a period of up to 14 years. The first four years can be interest-only, with the estate tax itself and the remaining interest spread evenly throughout the final ten years of the arrangement.

Equitable distribution for the next generation

Section 6166 can help with the estate tax conundrum but, unfortunately, that is not the only complicating factor a family-owned business often creates for estates. The next generation may have disagreements about how to pass the business equitably, beginning with the question of whether to sell the business to a third party or pass it to heirs intact.

If the business does go to the next generation, some heirs will likely not be active in the business and may not be interested in ownership. If they wish to liquidate their interests, can the business have adequate free cash to buy them out? It is also common for conflicts to arise regarding compensation paid to heirs who work in the business and how (or whether) their compensation should impact ownership distributions to those who do not.

How can you treat heirs fairly and pass assets in a way that respects the efforts of those who have devoted their time and talent to advancing the business as well as those who have pursued other paths? Owners should carefully consider these questions and make appropriate provisions in the estate plan, including optimal business succession strategies, many years before it is time to implement those plans.

Gifting versus selling shares


Another key question is how shares in the family business should pass to the next generation. Both gifting and selling are valid approaches and each method carries distinct advantages as well as disadvantages. No single approach is best in every situation, so it is important to understand the implications of selling versus gifting shares, in your individual family scenario.

When receiving shares as a gift, the donor’s basis in the stock passes to the recipient. Therefore, gifting the shares during the owner’s lifetime allows the business interests to pass to heirs at a lower value than if the heirs receive the entire value at death (assuming the business grows in value over the years). This can be a disadvantage if the younger generation sells the business because the gifted shares will have a lower basis than shares they inherit at a stepped-up basis.

Conversely, the younger generation takes a basis of the value at the date of sale (stepped-up basis, in tax parlance) if they buy shares, rather than receive them as a gift. The seller must pay tax on the difference between the selling price and the basis. Selling the shares can provide liquidity to the estate but creates an income tax liability for the seller, which can create an imbalance in the relative values of the inherited interests in the business.

Need for a business valuation

You will need to seek a professional business valuation, whether the business is ultimately gifted or sold; a discount for marketability and minority interest will reduce the transferred value. If the business is gifted, you will need to attach the formal valuation report to the gift tax return in order to claim a discount on the gifted entity. In addition, a valuation benefits owners by enabling them to identify vulnerabilities and strengthen financial performance before going to market, positioning the business to achieve maximum selling price.

Your business is a unique resource for your family. Thoughtful estate planning will reduce the risk of conflict after your passing while increasing the value and meaning of your legacy to future generations.

Brian Carter

Brian Carter, CPA, is a partner with Mauldin & Jenkins, LLC. Brian received his BBA in Accounting from Mercer University, in 1996, and is licensed as a CPA in Georgia and Florida. Since joining Mauldin & Jenkins, Brian has specialized in providing a variety of accounting, auditing and tax services to not-for-profit organizations, affordable housing developers, restaurants, construction contractors and manufacturing and distribution entities. Brian also consults with not-for-profit board of directors on governance and policy issues and is a frequent speaker to various trade and civic organizations on topics affecting the not-for-profit industry. Brian is a member of the American Institute of Certified Public Accountants, the Florida Society of Certified Public Accountants and a member of the Leadership Florida Cornerstone Class 38.

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