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.

I am very excited to welcome our speakers today to the third episode in our podcast series for closely held businesses. In this episode, we will cover estate planning, investment strategies, and the dynamics of passing your business to the next generation.

Dave and Mike, can you both please introduce yourselves?

DAVE: Thanks, Marcy. I have been looking forward to this third and final series of these podcasts because I am going to be able to spend time with my buddy, Mike Kirkman, who is an expert.

I have been working with closely held businesses for over 44 years. This is an area that I think is so important for many of our clients and listeners today. Mike, do you want to introduce yourself?

MIKE KIRKMAN: I am happy to be on the call and welcome everyone for listening in. I am Mike Kirkman, a tax partner with the Cherry Bekaert Advisory LLC group.

I also lead our estate, gift, and trust practice for the firm. My focus for over 30 years has been primarily on estate, gift, and trust tax planning for families, family offices, and their related businesses.

I really enjoy this area, and we have some good information we can share with you. Dave, what are some of the strategies for preserving wealth after the sale or the transfer of a family business?

DAVE: That is a really good question, Mike. It seems like everything starts with having a financial plan before you even begin.

The first assumption is that you have sat down with a financial planner, such as the group we are affiliated with, Choreo, or another financial planning outfit. This helps you see exactly what type of assets you may need after the sale of your business.

The second thing I was thinking about is irrevocable life insurance trusts. These trusts are designed to hold insurance policies that are transferred to the next generation.

When the owners pass away, there is liquidity for the estate for any potential estate taxes, and that amount is excluded from their estate. Do you have anything else to add, Mike?

MIKE KIRKMAN: I want to echo your comment about a financial plan. That is critical, and I think once we get through this podcast, people will see how that is the pivotal point of any type of planning.

Dave, how can tax-efficient investment vehicles play a role in this process of transitioning a business?

DAVE: I think it is critical because when you have a financial plan, you know exactly how much money you need to enjoy your life. Everyone needs to know the cost of achieving their dreams and desires.

Once they have that, things like municipal bonds can be very useful. I have seen many owners invest more in municipal bonds after selling their business because it excludes taxes and is a relatively safe investment.

Most business owners are looking to move from high risk to more safety once a sale or transfer occurs. Mike, what about using trusts for asset protection?

MIKE KIRKMAN: That is a great question. Properly structured trusts are an excellent tool to provide asset protection for post-sale assets.

Many times, we see asset protection trusts providing benefits that far exceed the current generation and reach all the way to future generations. Over the past 20 years, we have seen more business owners looking for protection from creditors, potential divorces, and lawsuits.

Properly structured trusts can do all of those things. Jurisdiction comes into play, so it is important to work with advisors who understand how these must be structured.

These asset protection tools are meant to be put in place for generations one, two, and three.

DAVE: Those are great points. You cannot predict the future or create a trust for every possible scenario, but they certainly help.

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

MIKE KIRKMAN: From an income tax standpoint, advanced planning is one of the key elements of a successful transfer, transition, or sale. The worst situations are those where unexpected or unplanned events occur, which can have a significant negative impact on a closely held business.

Advanced planning is also critical from a gift and estate tax standpoint. Planning for the sale or transition of a business does not happen overnight.

It is best to surround yourself with great advisors and create a timeline for the initiation of these strategies. Moving assets at a time when significant valuation discounts are available will save immediate gift and future estate taxes.

Consider that the current estate and gift tax rate is 40%. Every dollar of valuation discounts associated with a closely held business entity will generate tax savings.

For example, if a family has a $10 million business and wants to give 40%—a minority or non-controlling interest—to the next generation, our valuation team will perform an appraisal. Typically, the range of discount is between 25% and 40%.

Instead of moving $4 million at a full gift tax cost, you are moving it at a $2.6 million valuation. That results in over $560,000 in gift tax savings immediately.

If that interest is transferred to a properly drafted trust, all future appreciation is not subject to estate tax at the current or future generations. There is significant opportunity right now to save income, gift, and estate taxes.

DAVE: That is great. You have been involved with me on a couple of client situations where we could give more than 50% of the equity of the company using a non-voting share scenario.

You can gift many of the non-voting shares and retain the voting shares. This allows you to give away a lot of value in the business. Mike, are there any other strategies to consider?

MIKE KIRKMAN: We work predominantly with closely held family groups, and many of our clients have charitable interests. They initiate charitable plans both during their lifetimes and at death.

There are many options for lifetime and testamentary charitable transfers that provide benefits for the charity and family members simultaneously. Significant tax benefits are available if these are planned and timed properly.

With the gift and estate tax exemption at an all-time high of $13.99 million for US citizens, many clients are hesitant to gift large amounts of wealth. They worry about the impact on their lifestyle, cash flow, or the inability of the next generation to handle the wealth.

However, there are strategies available to minimize the financial and emotional impact on the senior generation while protecting that asset as the next generation matures.

DAVE: Another area involves state residency. I live in Illinois, which has a $4 million estate tax limitation.

Looking at where a client resides could yield significant savings if they move to a state with a higher estate tax limit. Would you agree, Mike?

MIKE KIRKMAN: Absolutely. I have worked with you on a number of estates in Illinois, and the lower exemption is a challenge.

In North Carolina, we do not have an estate tax. Only a few states still have an estate tax, so residency is very important to examine as family groups mature and look for retirement locations.

Dave, what should business owners focus on regarding investment and retirement planning when they are in the post-exit phase?

DAVE: It starts with that financial plan again. You have to have a roadmap, just as you would never travel a thousand miles without one.

Once you have that roadmap, I break it down into investments and retirement planning. You need to be sure the investments will yield the income necessary to provide the retirement you want.

You do not have to take a lot of risk. If the sale or transfer was large enough, there is no need to take the risks that were necessary while owning the business.

Business owners also need to consider their hobbies and interests. The post-exit phase is the time to spend on the things they never had time for previously.

MIKE KIRKMAN: Let's discuss the pros and cons of transferring ownership to family members. What are the benefits?

DAVE: Every situation is different, and there is not one strategy that works for every family. However, moving wealth now and removing future growth from estate tax exposure is a huge benefit.

Even if the estate tax is repealed, there are benefits to moving wealth into vehicles that protect future generations. Proper planning and structuring can help monitor how the next generation manages the business asset.

There is a high probability of success if the transition is done while the senior generation is still involved or acting in an advisory role. This ensures that the legacy of the business and family traditions can continue with guidance.

MIKE KIRKMAN: What are some of the potential downsides, Mike?

DAVE: A primary concern is the financial impact on the senior generation. Moving significant wealth can reduce cash flow, and the emotional impact of that cannot be minimized.

Family dynamics can also be an issue. Even if the senior generation blesses a successor, it does not mean all family members will support that transition.

Asset protection issues can arise if the next generation faces challenges. Not every potential successor possesses the work ethic or leadership skills to handle the new role.

It circles back to having a game plan and starting early. These things can take years to put into place effectively. Dave, how can owners effectively plan for succession and groom the next generation?

DAVE: That is the make-or-break question for transferring a business. It is vital to transfer ownership sooner rather than later so the senior owner can mentor the new leaders.

Statistics show that transitions to the next generation often fail because the new leader was not groomed properly. The successor should be in an environment where they are doing real work and learning every aspect of the business.

They should be given tough goals, just like any other employee. Having the senior leader involved in the mentoring process is essential.

MARCY SPIVEY: These insights have been really 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.

Whether it is preserving wealth after a sale, minimizing taxes, or grooming the next generation, each step is crucial. Thank you for tuning in to today's episode.

Don't forget to subscribe to our podcast channel for more insights on managing your business effectively. Until next time, I am Marcy Spivey, and this has been Cherry Bekaert's Private Client Services podcast.