Seven Things Family-Owned Firms Should Know About Succession Planning

For the family-run firms in the real estate industry, a crucial concern centers around ensuring the longevity of the business they've spent years building and the assets they may have accrued. It usually means the process of prepping children to take over the business itself, as well as any assets in the firm's portfolio. NREI consulted with attorneys specializing in succession planning for tips that family-run real estate businesses may want to keep in mind.

1. About succession planning.

Among the chief goals of Succession Planning is providing continuity of management, in addition to minimizing the tax costs of transferring property interests to new generations.

Succession Planning ensures the business has the capability of continuing profitability in case something happens to the owner or in case of death.

2. Succession planning is flexible.

Succession planning can be done in stages over many years or handled all at once. In either case, the goal is often to limit the cumulative transfers during the lifetime of the parents to a minority interest.

Clients may give gifts of interests in their businesses or properties to children during their lives, either outright or through trusts, Hoppe explains.

As parents increase the percentage of the business their children own, their estate tax at the time of death lowers, since it is based on their remaining ownership interest.

When done in stages, the process usually tends toward an annual giving “program” of percentage interests in the entity holding the property valued at annual gift tax exclusion limits (currently $14,000 per donor to donee), so the gifts do not create a gift tax impact.

Since each parent has an annual exclusion to use for the benefit of gifting to each of their children (and grandchildren), parents can combine for $28,000 of annual gifting to each child and the benefits can add up quickly without sacrificing other tax exclusions that do not renew each year.

As the children get trained to run the business, the ownership interest can be increased to grow with their involvement.

3. The sooner you start, the better.

The earlier you start, the better. 

There is more flexibility in implementing the plan and more opportunity to plan for tax issues.

In anticipation of the election, some family firms have gotten more aggressive last year, taking advantage of existing gift tax exemptions and valuation discounts by using all of their $5.5 million exemption at once.

The motivation was to pull as much value and appreciation out of their estates and give more to their children while the current limits were in place. They did this in advance of the new administration, as they were feeling uneasy and unsure of future tax law changes.

4. Research the appropriate business structure for your assets.

Historically, family firms and the properties held by them were structured as limited partnerships (LP).

With the advent of the limited liability company (LLC) and its widespread acceptance under both state law and federal tax law, for the last 15 years or so we are now seeing the LLC as the primary vehicle of choice—often having properties in separate LLCs to isolate risk.

LLC entity protections cover against spousal claims and creditor claims. It is a way to effectively shield the underlying property from creditors.

Part of LLC protection is that in many jurisdictions, it restricts creditors by forcing them to take a trip to court to obtain a charging order. In most cases, that result is not optimal for creditor collection and they choose to purse some other avenue rather than deal with that.

5. Keep in mind both ownership and management considerations.

You realize there's going to come a day when you can't do it all anymore. So when you approach succession planning, you must look at what you want your business to accomplish. And it allows your children to participate in ownership and management positions, that's the best way to groom them to fully take over the business later on.

In transition planning (the later stage of succession planning, which preps for transition of ownership), children can be made into property managers as well. Non-tax considerations to take into account in the progress of transition and succession planning include that a multi-stage transition plan gets lenders more comfortable. Lenders can begin to work with the next generation and see there is continuity in the business to make for a smoother transition.

As parents bring their children more and more into the LLC entity ownership, however, they need to remain mindful that they have obligations to all members of the LLC, and that they may lose some of their rights to run the business entirely as they see fit.

6. Observe taxation limits on inheritance of real assets

The assets owned by an individual at the time of his or her death are subject to federal and state gift and estate taxes.

But there is a federal tax exclusion amount on these taxes. Although it is nominally $5 million, that figure is adjusted annually for inflation. For 2016, the figure was $5.45 million in assets per business owner. In 2017, it will inch upward to $5.49 million.

So a married couple can theoretically pass almost $11 million worth of assets to their children that are not subject to federal inheritance tax, according to Hoppe.

With good succession planning, heirs can avoid having to sell off parts of the business to pay inheritance tax.

7. Keep an eye on regulations (or retain an attorney to do so).

Don't forget that succession planning is subject to statutory and regulatory changes, so family firms have to keep an eye on that. If the family is too busy managing the day-to-day operations of the business, it may be wise to retain a lawyer to watch for ongoing regulation changes as they arise.

Succession planning is an area the IRS has hammered away at for years, arguing that it is just a tax avoidance technique. In fact, there was a hearing at the D.C. Treasury on December 1, 2106 on a new rule that would do away with valuation discounts in succession planning. The measure has not yet been approved.

There was significant opposition voiced by attorneys' groups, CPAs and valuation experts, as well as business owners themselves, and we will know more as we enter 2017 whether Treasury and the IRS will heed the testimony and temper their approach to the problem as they perceive it.

With a Trump administration in the White House, it now appears less likely that stricter rules on limiting discounts on family transactions would be adapted.

Conventional wisdom among practitioners now sees President-elect Trump's administration as not as aggressive in this area.

This article was provided by National Real-Estate Investor, Diane Bell, and brought to you by the Ronald J. Fichera Law  Firm, where our mission is to provide trusted, professional legal services and strategic advice to assist our clients in their personal and business matters. Our firm is committed to delivering efficient and cost-effective legal services focusing on communication, responsiveness, and attention to detail. For more information about our services, contact us today!

Click on the Contact Us Link or go to the Virtual Estate Planning (VEPS) Page of our Web site.

As a reminder, this Blog Post is for informational purposes only and is not intended as legal or tax advice.