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Business Ownership and Estate Planning: Recapitalization

The estate planning process can be complex and confusing, which is one of the reasons it is a good idea to work with an experienced estate planning attorney as part of creating a comprehensive estate planning strategy. This is especially true for business owners. Recently, we wrote about some important estate planning considerations for business owners. One potential question many business owners may have when considering estate planning for their business is whether or not it is a good idea to remain in control of their business or transfer their business to their heirs.

When a business owner wants to remain in charge of their business, this can be a difficult question because transferring the ownership of a business can often mean transferring the management responsibilities of the business, too. While the answer as to whether or not remaining in control of your business is right for you depends on each business owner’s individual circumstances, one possible technique to consider is business recapitalization. Business recapitalization will allow you to separate ownership from management, and could be the right strategy for you.

Benefits of Recapitalization

The sooner you can transfer ownership of a business to an heir, the better. This will help any appreciation in the value and/or income of your business stay out of your estate for estate tax and gift tax purposes. This will lower the taxable value of your estate, which can save you money on other potentially taxable estate assets that will be totaled to make up the ultimate taxable value of your estate. Determining how to transfer the ownership is often a more complex question.

One potential option is for a business owner to retain a small percentage of the company that is made up of voting shares while distributing the remaining ownership of the company in the form of nonvoting shares to heirs. This allows you to retain the ability to make managerial decision within a business but ensures that the ownership of the company is secure in case anything happens to you.

It also accomplishes the goal of saving on taxes discussed above, especially since many times nonvoting shares are eligible to receive discounted valuation by virtue of the fact that such shares are limited by being nonvoting in nature. This will help heirs receiving nonvoting shares receive tax breaks on their ownership while allowing you to enjoy tax benefits related to your estate as well as your business ownership. This can be very helpful for business owners that have a great deal of their wealth and taxable assets tied up in their business. Even S corporations can take advantage of this strategy because voting and nonvoting shares don’t violate S corporation guidelines prohibiting multiple classes of stock.

You can also preempt issues that can arise among the heirs to your business by including provisions within recapitalization agreements that include buyout options for heirs that may not otherwise be satisfied with how a business progresses in the future. By creating a fair buyout agreement, you can alleviate the familial tension that can occur if heirs are left with the task of negotiating buyout agreements amongst themselves.

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