Dividing the Family Business: Money Matters

As business owners plan their succession, money matters are naturally going to be front and center in the conversations. They may be concerned about how to safeguard heirs through trusts or find appropriate insurance coverage. There are a number of options you can take advantage of to protect your legacy and family business. Also, there are a variety of professionals owners can get help from.

The Role of Trusts in Succession Planning

Trusts facilitate the smooth transfer of a business from one generation to the next because they hold and manage assets. When business interests are placed in trusts, a trustee controls assets based on guidelines outlined by the family.

The benefits of creating a trust when succession planning include:

• Continuity. Trusts allow families to control the day-to-day activities of the business, while the trust handles the assets. This helps maintain continuity of business operations so the family can continue working toward their vision.
• Liability. Trusts separate business and personal interests. This helps protect family members’ personal assets if the business faces liability issues. Also, trusts protect individuals from creditors.
• Family relationships. When a business is being controlled by a trust, it can alleviate some of the interpersonal pressure among family members. Ownership, responsibilities, and profit payments are explicitly defined, reducing the chances of infighting.
• Tax advantages. Trusts are a strategic way to protect families from certain tax obligations. For example, trusts may mitigate estate and gift taxes.
• Confidence. When companies experience a changing of the guard, it can cause regular customers to worry about service quality. Vendors may also become concerned about their relationships with the business. Employees fear for the stability of their jobs. When family businesses have a solid succession plan that includes trusts, confidence in the company can be maintained.
• Flexibility. Trusts are highly personalized. Family businesses make provisions for who benefits from a trust, how much compensation they receive, and the duration of disbursements, based on their individual needs.

There are several trust options that family businesses can take advantage of, including:

• Revocable living trusts. These trusts allow business owners to maintain control of the terms while they’re alive. When they pass away, it’s transferred to their successors so they don’t have to go through probate.
• Irrevocable trusts. Irrevocable trusts cannot be changed once they’re created, which protects heirs’ assets.
• Grantor retained annuity trust (GRAT). GRATs are an effective option for family businesses experiencing growth. These trusts allow heirs to avoid certain tax liabilities while receiving payments for a specified period.
• Dynasty trusts. Dynasty trusts allow families to control their businesses across multiple generations, thereby minimizing estate taxes. This strategy centralizes control of the business to a reliable advisor or institutional trustee, providing continuity and allowing the family’s mission to remain intact.
• Separate trusts for active and passive beneficiaries. Whether or not children are actively involved in the business can influence financial decisions. Participation rights may be available to heirs working at the organization. Those not involved may have a trust focusing entirely on financial returns.
• Spray trusts. As business and family dynamics evolve, spray trusts are adapted to the circumstances. This gives trustees the discretion to distribute income and principle based on current conditions and needs.
• Testamentary trusts. Testamentary trusts pass a company's shares to the next generation, but they don’t address day-to-day business operations. These trusts go into effect when the owner dies, and their terms are decided when its created.

Tax Considerations

When business owners address tax considerations during succession planning, they create efficient gameplans for their heirs. This also promotes family harmony by taking a potential hot-button issue off the table.

Tax concerns can be addressed by:

• Gradual transfers. Small annual asset transfers can gradually reduce the tax burden on the estate. As of 2025, the annual gift tax exclusion is $19,000.
• Valuation discounts. Business valuation discounts—such as minority-interest and lack-of-marketability discounts—reduce the taxable value of assets transferred to family members. IRS scrutiny for these discounts is high, so business owners should carefully document transactions.
• Installment sales to intentionally defective grantor trusts (IDGTs). This freezes a taxable estate. Future appreciation is transferred to the next generation, while first-generation owners receive retirement income.
• Grantor retained annuity trusts (GRATs). GRATs transfer appreciating business interests out of an estate. They also retain any income streams for heirs.

External Advisors: Your Objective Team

Succession planning for family businesses can be complicated, so it’s important to enlist the help of specialized advisors. During this process, owners may turn to several professionals.

• Estate planning attorney: Estate planning attorneys who specialize in family businesses will utilize tools that meet a company’s specific needs. That can include creating trusts, buy-sell agreements, and written company policies.
• CPA: An accountant familiar with business taxation and succession strategies understands the options. After conducting a financial analysis, CPAs explore the tax implications of possible decisions. Additionally, CPAs act as unbiased collaborators who help families navigate business discussions so everyone’s interests are taken into account.
• Business valuations expert: These professionals facilitate objective asset pricing. Their work includes evaluating tangible and intangible assets, portfolio diversification, and distribution history.
• Family business consultant: Provides advice on governance, long-term goals, and family dynamics. They help relatives mitigate risks that may affect their business, such as a high-stakes divorce.
• Psychologist: Since family business is an emotional affair, enlisting the help of a psychologist during succession planning may be valuable. Psychologists can help people navigate the emotional toll succession planning can take on the family, as well as mentally prepare the next generation to step into leadership positions at the business.
• Financial advisor: A financial advisor provides services related to personal and family wealth planning. Some of the work they do includes business valuation, asset management, successor retirement planning, and risk management assessment.
• Insurance specialist: An insurance professional can secure funding for a buy-sell agreement, key person coverage, and estate equalization. Also, they can help businesses manage their risk to protect their assets.
• Family law attorney: Working with a family law attorney can help protect the business from being drawn into a high-conflict divorce. Attorneys may draft a prenuptial or postnuptial agreement to protect the family’s interests.

The information we have shared here is for educational purposes only. It’s not meant to be legal, financial, or tax advice. Succession planning is complex, so get advice from appropriate professionals tailored to your needs. Also, information should be timely, as regulatory concerns change.

With the right advice, you can defend your legacy. The skilled attorneys at Bikel Rosenthal & Schanfield can help you protect your family’s business interests in multiple ways, such as by drafting a prenuptial or postnuptial agreement. Call 212.682.6222 or connect online.