Five tips for handling estate planning for closely held business

Estate planning for a closely held business is not conducive to one-size-fits-all solutions, and there are traps for the poorly advised.

Below are key steps business owners should take to prevent their businesses from being tied up in litigation, hobbled with tax liabilities, or controlled by people who have little understanding of the business:

1. Plan for incapacity and avoid guardianship. Think of who you would like to step in and manage the business if you become incapacitated. That person should be designated through a power of attorney or revocable trust. Failure to designate anyone in advance will, upon your incapacity, leave the decision-making power of the business in the hands of someone whom the guardianship court appoints. Important business decisions may also require advance court approval. Planning to avoid guardianship can help ensure that the business will continue to be efficiently managed if you become unable to do so.

2. Avoid probate. Property titled in your name is generally subject to a probate proceeding following your death. All assets subject to probate, including their fair market values, become public record. Probate is a time-consuming process that may require up to a year or more before your business may be transferred to your heirs.

The most common method to avoid probate is to create a revocable trust, sometimes known as a living trust, and transfer title of your business to that trust. A revocable trust functions as a substitute for a will. The primary difference is that assets in a trust are not public record and do not require court administration.

3. Don’t saddle your business with estate tax liability. Under current law, anyone who dies with a net worth of more than $5.43 million will be subject to estate tax within nine months of death. For married couples, the taxable threshold amount is $10.86 million.

Many closely held businesses exceed that value, often triggering a substantial tax liability. Coming up with the funds to pay the tax can sometimes be a challenge. Without advance planning, your estate may be compelled to borrow or sell assets to raise the funds.

Although estate taxes attributable to closely held businesses can often be paid in installments, the tax can be a significant hardship, especially during an economic downturn. Planning to minimize estate tax can involve many complex measures, including life insurance, buy-sell agreements, and sales or gifts to trusts. A team of qualified advisers should be involved.

4. Take advantage of income tax benefits. Death can bring hardship, but it also can bring income tax benefits. With proper planning, much or even all of the untaxed gains of a decedent’s estate can be eliminated. That is because the basis of your property for purposes of determining gain is adjusted, or “stepped up,” to the property’s fair market value at the time of death. For example, if you acquire stock for $10 and sell it during your lifetime for $100, you will incur capital gain of $90. However, if you hold the stock until your death when it has a value of $100, your estate will have no taxable gain if the stock is then sold for that amount.

It has long been a common practice for high net worth individuals to make gifts of business interests to the next generation in order to remove appreciating assets from the donor’s estate. Gifts do not receive a stepped-up basis for income tax purposes, but the estate tax savings is generally expected to outweigh the loss of income tax savings.

However, recent changes in the tax laws make the traditional calculus more complicated. Now that the estate tax exemption has increased to $5.43 million, it may be more tax efficient, depending on the circumstances, not to make significant gifts. Existing estate plans should be reviewed in order to ensure that income tax benefits are not left unused.

5. Plan for succession. Some business owners fail to adequately plan for succession of their business ownership. Succession planning varies on each family situation because spouses and children who inherit the business are not always prepared to assume immediate responsibility. At a minimum, a business owner should create a revocable trust and designate the person who will exercise voting control over the business upon the owner’s death or incapacity.

The bottom line. Many business owners devote much of their lives to building their business. It is well worth devoting attention to planning to preserve that business.

Steven E. Hollingworth is a partner in the Las Vegas law firm of Solomon Dwiggins & Freer. Reach him at

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