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Savvy estate-tax strategies for family business owners

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Protecting heirs from excessive estate taxes as well as familial discord are significant concerns for owners of family businesses.

As owners begin to age – and aren’t we all – they should carefully develop their estate tax strategy, making sure to educate heirs to take advantage of all savings mechanisms available, while simultaneously avoiding interpersonal pitfalls when passing the business to the next generation.

Family business owners would do well to remember that their business is illiquid and, in the event of their death, will be taxed as part of the estate.

For 2017, the Internal Revenue Service requires the filing of an estate tax return (Form 706) when the combined gross assets and prior taxable gifts exceed $5.49 million for an individual. And since a deceased spouse can pass his or her unused exemption to the surviving spouse, a married couple is able to protect $10.98 million from federal estate and gift taxes.


To decrease the odds that heirs will have to sell their family business at fire sale prices in order to pay their estate tax debt, they can take advantage of a discount available for lack of marketability, which applies to illiquid assets such as a family business, commercial real estate, family farms, art, antiques and collectibles.

Heirs who inherit illiquid assets such as commercial real estate, for example, will not be able to sell that real estate as quickly as they would be able to sell a liquid asset such as stock.

They will need to find a willing buyer – which can take some time. And since value is in the eye of the beholder, chances are buyer and seller will have differing views on valuation.


Luckily, those who inherit illiquid assets can take a lack of marketability discount on the value of the inherited estate, which decreases the amount of estate tax owed.

Since circumstances differ for every illiquid asset, there is no set discount amount.

Determining the value of an illiquid asset can be highly subjective, but a valuation expert can help beneficiaries determine a reasonable discount to claim for an inherited illiquid asset.

In general, the lack of marketability discount for a business entity that has predictable cash flow will be lower than the discount for a business with less consistent cash flow, since these businesses would be less desirable and, therefore, less marketable.


Once business owners consider the estate tax ramifications for illiquid assets, they should strategize to mitigate interpersonal drama when passing the business to the next generation.

Sometimes, members of the next generation grow tired of waiting for the owner to pass on the business’ reins and quit the business prematurely.

One way to incent a child to wait patiently for business shares is to design the shareholder agreement so that if the child walks away from the company, he has to give back his shares at book value.


In another scenario, the daughter of a family business owner wants to carry on in the business, but the owner’s son does not share his sister’s enthusiasm.

How can the owner ensure fairness in his children’s respective inheritances?

One solution is to gift shares in the business to the daughter while putting funds of equal value in a trust for the son.


A final note: As long as the owner of a family business remains as the general partner of a limited partnership (or managing member for a limited liability company), he can maintain decision-making control – even if he has gifted the majority of shares to family members.

This can help shield assets from future scurrilous former daughters-in-law or sons-in-law.

Michael Joyce, founder and president of JoycePayne Partners of Bethlehem and Richmond, Va., is responsible for overall investment strategy, management of investment portfolios and financial counseling services. He can be reached at mjoyce@joycepaynepartners.com.

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