Transitioning the Closely-Held Enterprise
A closely-held business often represents the largest single concentration of wealth on a family's balance sheet. A poorly executed transition can result in liquidity crises, punitive taxation, and family fracture.
Valuation and Structuring
The IRS strictly scrutinizes the valuation of private shares transferred to heirs. Utilizing a Family Limited Partnership (FLP) or LLC can allow senior generations to transfer non-voting shares at a discount due to lack of marketability and control (frequently 15-35%).
Key Executive Retention
If the business is to remain operational post-transition, retaining non-family key executives is critical. Non-qualified deferred compensation plans or Phantom Stock arrangements provide retention incentives without diluting family equity.
Common Mistakes
- Lack of Buy-Sell Agreements: Failing to stipulate what happens if a partner dies or divorces.
- Inadequate Liquidity: Estate taxes on a business are due in cash nine months after death; without life insurance or liquid reserves, a forced sale may occur.