Many of our clients are talented entrepreneurs and owners of successful companies. Given the importance of their businesses in their lives, it is not surprising that providing for the disposition of their businesses is an important part of their estate plans.
At the outset, we identify the vision the client has for the business. Some business owners want to see their heirs continue running the family business. Others might prefer to see the business sold and the proceeds distributed to the heirs. Some business owners contemplate running their business until they die, while others may wish to gradually transfer control to their heirs during life while they stay on in a reduced consultant-type role.
If the client is the sole owner of the business, or the only other co-owners are close relatives, the focus of the estate plan may be to transfer the business to the next generation. Clients are naturally concerned about tax burdens when they dispose of their business, but non-tax considerations can be equally important; many detailed questions must be addressed. Are the children of the business owner old enough and mature enough to handle the running of the business when the owner passes away, or will the business need the temporary guidance of another party (such as a trustee or a senior employee) while the children learn the business? Has chemistry among the heirs (or lack of it) been considered in envisioning how the business will operate after the owner passes away? Does the owner wish to part with any equity or voting powers in the company during life? In the event the owner’s heirs are not interested in continuing the business, has the executor of the owner’s estate been granted the flexibility needed to sell the company at the best price?
If a client is just one of multiple owners in a business, we may recommend the drafting of a buy-sell agreement. A buy-sell agreement is sometimes thought of as a business’s version of a last will and testament. Typically, the agreement specifies the rights and obligations of the owners upon the death or disability of one of the owners. Nuances abound in buy-sell agreements; for example, it is important to address what happens when an owner divorces, especially if the owner lives in a community property state such as Texas. In addition, because obligations under the buy-sell agreement to purchase or redeem interests in the business are often fulfilled using insurance proceeds, an experienced attorney should review the structure of any life insurance policies involved in the buy-sell agreement to ensure the tax efficiency of the structure.
Tax reduction is always a goal in our plans. When clients wish to leave the family business to their heirs, a variety of sophisticated techniques, ranging from a Grantor Retained Annuity Trust (GRAT) to a sale to an intentionally defective grantor trust (IDGT), can be used to minimize taxes. When clients opt instead for a sale of the business, whether late in life or upon their passing, we structure the sale as needed (see Sale of a Business tab).
Finally, in laying the legal foundation for the owner’s vision for their business, we take a broad view of the client’s situation. Business succession planning can be complicated; it influences, and is influenced by, other elements of an estate plan. Garza & Harris strives to work with a client’s entire team of advisors- accountant, life insurance agent, financial advisor, and any in-house legal counsel- to draft a plan that takes into account all of a client’s circumstances.