Ten Succession Planning Strategies: An Overview of Their Tax Benefits and Burdens

Recent tax law developments (e.g., gift and estate tax changes) highlight the importance of examining and employing succession planning strategies that enable the business owner to minimize the federal tax consequences of the transfer of their business. The IRS made lifetime transfers of family-owned business stock more appealing when it ruled that, for gift tax purposes, the value of a gift of a minority block of stock in a closely held corporation (that has only a single class of stock) should be determined without regard to the family relationship of the donee to other shareholders.2 (This reversed the Service's prior position of aggregating family members' shares when determining if shares transferred within the family should be valued as part of a controlling interest.) And stating the obvious, it also removes future appreciation of the gifted business assets from the taxable estate figure. [...]if the Michaels make simultaneous gifts of 25% of all their shares in LDC to each of the four children, each gift's value-and the applicability of a minority interest discount-would be considered separately, not by aggregating all the Michaels' holdings in LDC immediately before the gifts. Another distinct attraction is the relatively smooth transition it offers, easing the business and the family through a trying situation. Because control of the business remains with familiar (and, one hopes, friendly) parties, family disputes may be minimized, and forced liquidations are less likely. [...]Code Sec. 303 stock redemptions to pay estate taxes are generally not taxable, provided the stock's value exceeds 35% of the value of the decedent's adjusted gross estate and specific time, use of proceeds, and rede'-ng shareholder tests are met.