In March, INDUSTRIAL DISTRIBUTION hosted a webcast on succession planning for family business owners. Entitled “Exit Strategies for the Family Business Owner,” the event featured ID columnist and tax/legal expert Bart Basi, who talked about the importance of succession plans and how to establish them. Basi answered questions from attendees, a few of which we've highlighted here:

How do we minimize the tax aspect of passing on a business to key employees and/or younger family members?

Minimizing taxes while passing a business interest from owner to successor is an involved process, whether the business is being passed to a key employee or an heir. But there are two separate and distinct fundamental courses of action when discussing heirs and key employees.

First, transferring to heirs is very different from selling to third-party employees. Generally, it is best in closely held businesses to sell an interest in a business to the next generation, as opposed to gifting the interest. The reason for this is that the entity is sold intact, tax issues are dealt with and estate tax issues of the parents are handled expeditiously. The tax issues, in this scenario, are handled on an asset-by-asset basis and estate planning is done accordingly, using various instruments to minimize tax liability.

When selling to a key employee, the tax issues fall onto the sellers. In these cases, it is generally best to attempt a stock sale as opposed to an asset sale. However, for tax reasons, many buyers oppose stock sales. If the election is made to do an asset sale, the asset allocation should be weighted toward goodwill and other gains that will be capital in nature, as opposed to ordinary or resulting in sale of fully depreciated assets.

What are some parameters for deciding what type of trust to use?

Use your discretion when it comes to trusts. Living revocable trusts are generally used when someone wants to transfer assets when the threat of estate tax liability is essentially nonexistent. The revocable trust gives the grantor the power to essentially control the asset and even revoke the transfer. In situations giving rise to estate tax liability, it is generally best to use irrevocable trusts. Irrevocable trusts will generally shield part of the estate from being subject to tax liability.

Again, your discretion is key. For example, it is sometimes beneficial to have a trust contained in a will; at other times, free-standing trusts are necessary.

The Generation Skipping Transfer Trust, commonly referred to as a Dynasty Trust, is used when one generation (usually grandparents) wants to transfer assets by skipping one generation in favor of the next. It is used when the grantor perceives that it would be highly detrimental to their estate to do a direct transfer to their children. Factors include financial indiscretion of the children, disability, etc.

If a family member is treated as an employee, can the sell arrangement be made to the family member as an employee?

Absolutely. Even though a person is a family member, he or she can still be treated as an employee. However, when treating a family member as an employee—depending on the circumstance—certain scenarios arise that must be reviewed on a case-by-case basis.