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Abstract: Devising and implementing an effective family business succession strategy requires much more than simply estimating the value of the business and buying life insurance to cover any transfer taxes due or to "equalize" the estate among all heirs. This approach skips too quickly to identifying and solving the client's liquidity need. Two initial considerations must be addressed before any liquidity need can be accurately identified and effectively solved. First is repackaging: considering whether the business's ownership must be restructured to facilitate a more taxefficient transfer. Next is redeploying: considering what transfer technique is appropriate (beyond simply relying on undiscounted gifts of voting shares during life or upon death). The purpose of this article is to focus on these first two key considerations broadly, noting along the way how various liquidity need solutions can be properly and effectively integrated. When combined, these constitute an overall strategy of repackaging, redeploying, and leveraging.
Introduction
Family-owned businesses are critical to the American economy. Recent statistics attribute 40% of the nation's gross national product (GNP) to family businesses. Moreover, it has been estimated that family businesses generate approximately nine out of 10 new jobs. But despite the significant role they play in supporting the nations economy, only about one in three survives to the second generation. The estimate of successful transfers to the third generation ranges from only 10 to 20%.1
The burden of paying various state and federal transferor taxes on the value of the business may be part of the cause. Often, however, the true reason is that a lack of succession planning fails to allow the family to bridge the generation gap by having trained and capable successors in place. It is for this reason that estate planning for the owner of a family business is among the most challenging tasks of an estate planner. Succession planning for a family business requires more than basic estate planning tools. It requires an ability to consider the special rules that impact family business succession plans, identify the unique opportunities for structuring ownership to take maximum advantage of the available transfer techniques, and carefully select which of these transfer techniques, or combination of techniques, best suit the client's needs.
What Is Family Business Succession Planning?
Family business...