Category Archives: Estate Taxes

Transferring Your Family Farm or Business to the Next Generation

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Business Succession Planning- Passing Your Business to the Next Generation, Part I: Advice from a Montana Business and Estate Planning Attorney

Montana is a place where family values are reflected in our business practices and many successful businesses are completely family owned. However, many small or family owned businesses do not have an adequate plan in place for passing on the business. Whether considering passing the family farm to the next generation or planning for retirement, business succession planning is essential to a smooth transition for your business and your family.

Today’s entry is the first part of a two part series on business succession planning, in which I will provide a brief overview of business succession planning. Part II will address some of the specific considerations relating to an unexpected death or incapacity, or retirement, in detail.

What is Business Succession Planning?

Essentially, business succession planning is long-term planning for the transfer of your business assets; either to the next generation or to other business partners. Business succession planning is the process of planning for the unexpected occurrences, or the “what ifs,” in business such as an unexpected death or retirement of a partner or manager. It allows the business, and its owners, to agree in advance to issues such as what consent is required to transfer business interests, to whom may an owner transfer business interest to, or how to determine the value of those interests.

The end goal of the business succession planning process is to have a solid agreement in writing that reflects the long-term strategy for the potential transfer of ownership in the business.

Why should you consider business succession planning?

Every business should consider business succession planning both at the initial start-up of the business, and periodically throughout the life of the business. Mainly business succession planning allows the business and owners to have more control of the unknown and unexpected that may come up with the business. Perhaps it is more important to consider what happens without business succession planning. Without it, the business may incur significant losses or the owners may even lose the business due to issues such as liquidity problems, family conflicts or tax issues.

Initial Considerations in Business Succession Planning.

First, if you have not already done so, consider a separate entity for your family or small business. A Limited Liability Company (LLC), Family Limited Partnership (FLP), or other corporate entity is an essential step in easing the transfer of your business to the next generation.

Next, review and discuss the long-term business goals with all of the owners, managers or officers; evaluate the current status of the business and where you want it to be in the future. The most important aspect of business succession planning is clear communication between all involved, which means the business partners, owners, managers, directors, and family members.

A major consideration in this process is deciding and agreeing on who will be the successors. Will it be family members, existing owners or third parties? Especially if you own a business with partners whom are not members of your family, it is essential to make clear, and agree upon issues such as whether or not you may transfer your interests to your children. If a transfer to your children is permissible, then discuss what role your children play in the business and whether or not additional training may be necessary.

In addition, it is important to consider the timeline for transferring interests. If the business owners have agreed to allow transfers to children or other family members, then determine whether or not transfers will take place all at once or incrementally over time. Within this timeline also discuss what training may be required, and how involved family members will be at each phase of the transfer.

During this process, always be mindful of estate and gift tax issues. Speak with your accountant or attorney to determine whether a sale of your business interests is preferable to a gift or bequest. Make sure you understand the tax implications for everyone involved.

Communication about these issues ahead of time will help to reduce conflicts in the event of unforeseen circumstances and ensure the business has the adequate resources to carry on into the future. 

If you have questions about business succession planning, contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

New Federal Estate Tax Exemptions for 2012

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The IRS recently announced that it will increase its federal estate tax exemption amount for 2012. For an estate of an individual that dies during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 in 2011.

The federal estate tax is a tax on property transferred pursuant to a death. Essentially, it is the tax that the family or beneficiaries of a deceased person must pay on that inheritance. Only those estates that exceed this amount must pay estate taxes, and the estate is only taxed on that portion of that exceeds the threshold amount.

For purposes of determining whether or not a federal estate tax return is required, it is important to determine the value of the “gross estate.” The “gross estate,” consists of the fair market value of everything owned on the date of death. The IRS also allows adjustments for taxable gifts and certain deductions including deductions for mortgages, debts and the expenses to administer the estate. Moreover, all property that passes to the surviving spouse or a charitable organization with federal 501(c)(3) exempt status is excluded from the taxable estate. After these adjustments and deductions are accounted for, only those estates with a “gross estate” that exceeds $5,000,000 (or $5,120,000 in 2012) need to file a federal estate tax return and pay estate taxes.

In addition, the IRS permits reductions in value for certain real property in determining the value of the estate. The total decrease in value permitted will decrease in 2012. For Special Use Valuation for qualified real property, the aggregate decrease in the value of the property resulting from the election cannot exceed $1,040,000, in 2012, up from $1,020,000 for 2011.

There are a number of other exemptions and reductions permitted in determining the gross value of the estate for federal estate tax purposes. For a complete list of the increases in tax benefits for 2012 see http://www.irs.gov/newsroom/article/0,,id=248485,00.html, which lists all of the income tax benefit increases, exemptions, standard deductions, and tax brackets for 2012.

Federal estate tax calculations are complicated, so I always recommend working with CPA to determine whether or not an estate tax return is required for a specific estate. However, the best way to ensure that your family avoids paying federal estate tax is to plan ahead with the use of trusts and other estate tax reducing tools. Work with a team including an estate planning attorney, financial planner and accountant to determine how you can plan your estate to reduce taxes and other complications for your family.

For questions or advise on federal estate tax and estate planning contact Kalispell, Montana attorney Kelly O’Brien at (406) 752-6373.