Business Succession Planning Still Important in 2018

Last Updated: November 16, 2018By

By Michael Trainotti

In 2018 under current law, the estate and gift tax is $11,180,000 for an individual and $22,360,000 for a couple until December 31, 2025. However, for the closely held business, succession planning for the next generation and continuation of the closely held business is still very important.  The same is true for rental real estate that is owned by either a limited liability company (“LLC”) or a limited partnership (“LP”). This article will discuss both types of ownership.

There are many non-tax reasons for such planning. The old saying that “You Can’t Take It With You” is still quite true today as it has been in the past.  We all know that the business environment is more complex today than in the past.

Closely Held Business.  In a recent article written for tax professionals, Own Fiore discussed 10 non-tax factors why business succession planning is still relevant now and in the future.  In my practice I have discovered that each family and business face their own particular set of challenges based upon the family and business dynamics. Some but not all of the 10 factors that I typically discuss with my clients based upon their own circumstances are as follows:

  1. Where does the property go at death of the business owner? Many couples have wills or revocable living trusts, but often the document provisions are out-of-date, with asset value changes, family situations being changed, and, of course, changes in tax law. With the much higher Federal estate tax exemption level, there is more property that will go to heirs; therefore, what are the goals and wishes of the business owner?
  2. Asset protection planning against the claims of third party creditors is an important part of succession planning. The effective use of entities, such as FLPs, FLLCs and S corporations is an important succession planning task.
  3. Where there is an active family business, or even a substantial investment asset portfolio, how should the senior family members deal with succession both of management and of equity ownership? Again, both trusts and business entities are key to success here, but advance planning is critical.
  4. Important issues of dealing with disability, incompetency and substance abuse must be recognized and resolved both at the senior generation and younger generation levels. Tracing of property ownership and insuring that structures will work in a practical way are important aspects here.
  5. Marital dissolution is a fact that often is involved, and so “split family” issues and relationships must be dealt with properly and with care. Separate legal counsel may well be necessary for the parties involved.
  6. Management succession perhaps is the most important and difficult issue in succession planning – who is the successor manager, whether a CEO or trustee? Trust provisions must give clear direction and minimize disputes and litigation. However, they must be flexible enough to take into account changes in circumstances.
  7. Retirement plan management and distribution planning is important in many succession plans, especially as successor generations can benefit from income tax deferral in the retirement plan or IRA. This is especially important in this era of rising income tax levels.
  8. Where the child or grandchild is or may become a “spendthrift” not being able to properly handle financial assets, clearly the irrevocable, perhaps dynastic, trust should be considered. The trust is extremely flexible and able to be tailored to the family and its own needs.
  9. The education of heirs within the family, so as to equip them to deal with wealth as succession takes place is very important. This is an area in which the senior generation, while often retaining reasonable controls, can assist the younger generations in becoming capable of managing and using wealth. Here, in larger estates, the “charitable alternatives” play an important role.

The above factors leads to designing the succession plan to fit the particular needs for each family and business. For example, many young families are still building estates so life insurance provides a way of eliminating debt and educating young children.

Where the estate value of a couple is between the $11,180,000 to $22,360,000 range, the estate death tax is not an issue.  This means that structuring trusts to insure stepped-up income tax basis at death, and having management succession in place are all-important considerations, especially when the business will not be sold.

Lastly, the mega-estate of a couple assets values are over the $22,360,000 plus requires more planning. The traditional valuation planning, entity structures, gifting and shifting wealth techniques are important, and will continue to be popular (with due regard for possible adverse legislative changes).

LLC and LP. If you want to utilize the parent-child exclusion, the real property must be distributed out of the LLC or LP in order for the parent to transfer the real property to his or her children.  The parent child exclusion is $1million assessed value of non-residential real property.

The Internal Revenue Service (“IRS”) on August 3, 2018 issued new proposed regulations (“Regulations”) that may cause additional planning of both LLC and LP interest regarding the 20% deduction of Qualified Business Income (“QBI”) on rental property income.  There are two main issues that will impact your tax deduction.  One is the threshold amount of your taxable income (single person with taxable income more than $157,000 and married couple 315,000).  The other is whether or not you purchased the real property within the last 10 years, and also the 2.5% cost on all qualified property tests (building) for depreciation.

It appears that if an LLC or LP owning appreciated property is distributed prior to the death of a partner or the sale of a partnership interest, then the property may benefit from a full basis step-up upon the partner’s death or the sale of the partnership interest, which would not occur if the property were still held in the partnership, even if a 754 election was in place. Because many taxpayers will not benefit from discounts these entities afford for estate tax purposes while exemptions are high, it may be advantageous to liquidate entities before a partner’s death or before the sale of a partnership interest in some instances.

Michael Trainotti, Inc., A Law Corp
400 Oceangate, Suite 520
Long Beach, CA 90802
Work: (562) 590-8621
Fax: (562) 590-8181


Email Subscription

By submitting this form, you are consenting to receive marketing emails from: Apartment News Publications. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact