The Business Legacy Blueprint: Securing Your Future After Transition

MARCY SPIVEY: Welcome back to Cherry Bekaert's Private Client Services Podcast channel. I am Marcy Spivey, the leader of our Private Client Services group, and I am very excited to welcome our speakers today to the third episode in our podcast series for closely held businesses.

MARCY SPIVEY: In this episode, we'll cover estate planning, investment strategies, and the dynamics of passing your business to the next generation. Dave, Mike, can you both please introduce yourselves?

DAVE: Thanks, Marcy. I've been looking forward to this third and final series of these podcasts because I can spend time with my buddy Mike Kirkman, who's an expert. I have been working with closely held businesses for over 44 years, so this is an area I think is very important for many of our clients and listeners.

MIKE KIRKMAN: Sure. Happy to be on the call and welcome to everyone listening. I'm Mike Kirkman. I'm a tax partner with Cherry Bekaert Advisory LLC. I also lead our estate, gift, and trust practice for the firm. My focus for the past 30-plus years has been estate, gift, and trust tax planning for families, family offices, and their related businesses. I really enjoy this area, and hopefully we have some good information to share. Let's get right into it.

MARCY SPIVEY: Dave, with the first question I'm going to extend to you. What are some strategies for preserving wealth after the sale or transfer of a family business?

DAVE: That's a really good question, Marcy. Everything starts with having a financial plan before you even do the sale or transfer. The first assumption is that you've sat down with a financial planner, such as Choreo or another financial planning firm, to determine what assets you may need after the sale of your business.

DAVE: Another strategy is using irrevocable life insurance trusts. These trusts are designed to hold insurance policies in trust and transfer them to the next generation so that when the owners pass away there is liquidity for the estate to cover potential estate taxes. That insurance amount also gets excluded from the owners' estate.

MARCY SPIVEY: Do you have anything else to add, Mike?

MIKE KIRKMAN: I agree with your comment about a financial plan; that's critical. Once people complete this podcast, they will see how pivotal a financial plan is to any type of planning in this area.

MARCY SPIVEY: Dave, one more question. How can tax-efficient investment vehicles play a role in transitioning a business?

DAVE: It's really critical. When you have a financial plan and know how much money you need to enjoy your life, you can select investments to meet that need. Municipal bonds are one example I've seen a lot of owners invest in after selling their business, because interest from many municipal bonds is tax-exempt and they are relatively safe. Many business owners move from higher risk while running a family-owned business to more conservative investments after a sale or transfer.

MARCY SPIVEY: Mike, what about using trusts for asset protection?

MIKE KIRKMAN: Properly structured trusts are an excellent tool to provide asset protection for post-sale assets. Asset protection trusts can provide benefits that extend beyond the current generation to future generations. Over the past 20-plus years, we've seen more business owners seek protection from creditors, potential divorces, and lawsuits for both current and future generations. Jurisdiction matters, but working with advisers who understand how to structure these trusts is essential. These asset protection tools are meant to protect generation one, generation two, and generation three.

DAVE: Those are great points. You can't predict the future or create a trust for every possible scenario, but they certainly do not hurt.

MARCY SPIVEY: Mike, let's talk about estate planning. What considerations should business owners keep in mind to minimize tax implications?

MIKE KIRKMAN: There are a couple of areas I'd like to comment on. Advanced planning is one of the key elements to a successful transfer, transition, or sale of a business. The worst situations occur when unexpected or unplanned events happen, and those events can have a significant negative impact on a closely held business or a key family asset from a gift and estate tax standpoint.

MIKE KIRKMAN: Planning for the sale or transition of a business does not happen overnight. Surround yourself with great advisors and create a timeline for planning and initiating strategies leading to that transition or sale. Moving assets when significant valuation discounts are available will save immediate gift and future estate taxes.

MIKE KIRKMAN: For example, if the federal estate and gift tax rate is 40 percent, every dollar of valuation discounts associated with a closely held business will generate tax savings. If a family has a $10 million business and wants to give 40 percent of the business, which is a minority or noncontrolling interest, our valuation team will appraise that 40 percent interest. Typically, discounts range between 25 and 40 percent or more.

MIKE KIRKMAN: If you transfer 40 percent of a $10 million asset, you're moving $4 million, but you're not moving it at a $4 million gift tax cost. You may be moving it at $2.6 million instead of $4 million. Right away, that is over a $560,000 gift tax savings. If that gift is transferred to a properly drafted trust, all future appreciation associated with that 40 percent interest may not be subject to estate tax at the current generation and potentially at future generations. There is a lot of opportunity for this type of planning to save income, gift, and estate taxes.

DAVE: That's great. Another point we've worked on with clients is gifting non-voting shares. You could gift more than 50 percent of the equity if you gift non-voting shares while retaining voting shares, effectively giving away much of the value while maintaining control.

MIKE KIRKMAN: I agree totally.

MARCY SPIVEY: Mike, are there any other strategies to consider in estate planning?

MIKE KIRKMAN: Absolutely. We work predominantly with closely held family groups, and many clients have charitable interests. They implement charitable plans both during their lifetimes and at death. There are many options for lifetime transfers and testamentary charitable transfers that can provide benefits for the charity and family members simultaneously. When planned and timed properly, these strategies can provide immediate and future tax benefits and save significant gift, estate, and income taxes.

MIKE KIRKMAN: Another item is the gift and estate tax exemption. With the federal exemption at an all-time high of $13.99 million for U.S. citizens and residents, many clients hesitate to gift large amounts of wealth, such as a percentage of a closely held business, for reasons including the senior generation's lifestyle needs, cash flow concerns, the ability of the next generation to handle transferred wealth, and asset protection reasons we discussed earlier. There are strategies available to minimize the financial and emotional impact to the senior generation while protecting assets for the next generation as they mature.

DAVE: One other area I think about is residency. I live in Illinois and many clients are in the Chicago area. Illinois has only a $4 million state estate tax limitation. Looking at a client's state of residency could yield significant savings if they were to move to a state with a higher or no estate tax.

MIKE KIRKMAN: Absolutely. Residency for estate tax purposes is very important to examine as family groups mature and consider retirement locations. Some states have estate taxes and others do not, and planning around residency can be very valuable.

MARCY SPIVEY: Dave, what should business owners focus on in terms of investment and retirement planning in the post-exit phase?

DAVE: It starts with a financial plan or roadmap. You cannot travel a long distance without a roadmap, and an individual needs that same roadmap for post-exit life. Once you have the roadmap, you can break planning into investments and retirement planning. Make sure investments will yield the income needed to provide the retirement you envision in the post-exit phase.

DAVE: If the sale or transfer was large enough, there may be no need to take the same risks you took while owning the business. It's also important to consider nonfinancial aspects, such as hobbies or interests. The post-exit phase is a time to pursue activities you may not have had time for while running the business.

MARCY SPIVEY: Mike, let's discuss the pros and cons of transferring ownership to family members. What are the benefits?

MIKE KIRKMAN: Every situation is different, and no single strategy works for every family. Key benefits include moving wealth now and removing future growth from estate tax exposure. Even if estate and gift tax provisions change or are repealed, there are benefits to moving wealth into vehicles that protect future generations.

MIKE KIRKMAN: Proper planning and structuring can assist and monitor the next generation in managing and protecting the closely held business. Doing it while the senior generation can oversee and advise greatly increases the probability of a successful transition. This also helps ensure the legacy of the business and family traditions continue with guidance after a transfer.

MARCY SPIVEY: What are some potential downsides?

MIKE KIRKMAN: Primary concerns include the financial impact on the senior generation after the transition. Moving significant wealth to the next generation without proper planning can reduce the senior generation's cash flow and affect their lifestyle. There is also an emotional impact that must be considered.

MIKE KIRKMAN: Family dynamics can be an issue. The senior generation's blessing on a successor does not guarantee all family members will embrace or support the transition. Not all family groups are aligned philosophically. Asset protection issues for future generations can arise if children have personal problems. Not having a true successor or having a successor who lacks the necessary work ethic or leadership skills can be major issues. These challenges underscore the need for a game plan and starting early, as successful transitions often take years to implement.

MARCY SPIVEY: Dave, how can business owners effectively plan for succession and groom the next generation of leaders?

DAVE: This is the make-or-break question for transferring a business to the next generation. Transfer ownership sooner rather than later so the senior owner can mentor the new leaders. Many transfers fail because the new leader has not been properly groomed.

DAVE: The successor should work in the business and perform real work over time, learning every aspect of the business. Give them challenging goals and hold them accountable, just like any other employee. Proper training and guidance from the senior leader are essential for the successor's success.

MIKE KIRKMAN: I totally agree with that, Dave.

MARCY SPIVEY: We're hitting time, so it's time to wrap up. These insights have been helpful. Planning for the future of your closely held business can be a complex journey, but with the right strategies you can ensure a smooth transition to secure your financial legacy. Whether it's preserving wealth after a sale, minimizing taxes through estate planning, or grooming the next generation of leaders, each step is crucial.

MARCY SPIVEY: Thank you for tuning in to today's episode. Don't forget to subscribe to our podcast channel for more insights and advice on managing your business effectively. Until next time, I'm Marcy Spivey and this has been Cherry Bekaert's Private Client Services Podcast. If you have any questions or need assistance, do not hesitate to reach out to our