How will you pass down your family business?

Creating an estate plan

Certain assets have value that far exceeds their price tag. Art collections, homes and other real estate, and family businesses are among the classic examples of this. Such possessions may take many years to amass and develop. In the process, they tend to acquire emotional significance to their owners. They may even form a key part of a family’s identity and legacy. This contrasts with, say, portfolios of publicly traded securities. Equities and bonds – while valuable – are ultimately fungible assets that can be bought and sold in an instant.

Given their dual financial and emotional importance, your unique assets demand special consideration when you create an estate plan. By placing them into an appropriate trust structure, you may be able to transfer them to future generations in a smooth and tax-efficient way. Failing to plan in this way, however, can risk serious and unintended complications, including total loss. Outside of a trust structure, your prized possessions may be subject to heavy taxation. They may also have to be distributed to heirs in a way that runs contrary to your wishes. 

Utilizing a trust structure can provide other benefits. By defining rights and privileges in writing, it can help navigate delicate family dynamics and mitigate possible conflicting interests, especially with regard to family businesses. A trust may thus help give you and your beneficiaries peace of mind that special assets will be safeguarded and may be kept within the family for generations.

Family business succession planning

A common challenge for family leaders is how best to pass the ownership of the family company to beneficiaries and future generations. In many cases, ineffective or no estate planning has resulted in unanticipated taxes, unwelcomed publicity, and family infighting.

A particular issue that many family leaders struggle with is ensuring the efficient transition of the family business while simultaneously supporting children with varying and sometimes competing interests. Frequently, family members have different career aspirations, where one child may wish to take the helm at the family business and another child might pursue an unrelated profession or venture.

If you are a business owner, what can you do to treat all beneficiaries fairly and keep the business within the family? One possibility is to recapitalize the company by creating different share classes. One share class might retain voting rights and thus effective control of the company for the children that are actively involved in the business. The other share class would shed voting rights, but still benefit from dividends. These shares would this help preserve the economic interests of the family members who do not take part in the business.

If executed correctly, such a recapitalization may also allow for valuation discounts, which could result in increased gifting opportunities. Both classes of stock can still offer financial wellbeing for family members and allows the business owner to decide the roles beneficiaries would have vis-à-vis the company.

The benefits of a trust

A bespoke trust structure may thus ensure that a family business is safeguarded and retained within the family for generations to come. Trusts may not only provide for confidentiality and the tax efficient transfer of wealth, but may also serve to incorporate a business plan, where you and your fellow family leaders can define precisely how they wish your business to be managed in the future.

Importance of succession planning

Ultimately, it is natural to want the peace of mind that comes from knowing that prized possessions will continue to provide for and be enjoyed by future generations as you intend. It is important that you thus carefully consider how to structure your family businesses and other special assets, incorporating them into a holistic wealth plan.

Citi Private Bank Trust has a dedicated team of experts who will work closely with your independent tax and legal advisors to structure your prized possessions in a tax-efficient manner, while maintaining confidentiality and possibly avoiding the costly delays of probate. If you would like to find out more about how we can help you, please contact your Private Banker.