Elder Law Report
Elder Law Report
Securing Your Family Business: Strategies for Succession and Legacy Planning
Ever wondered how to secure your family business for future generations while avoiding headaches like lengthy probate processes? Join us for an enlightening conversation with Britton Begley, where we reveal essential strategies to ensure a smooth transition of business ownership across generations. You’ll learn how to harness the power of LLCs and trusts to protect your assets and maintain control over business operations and income distribution. We share practical examples, like the innovative "Russian nesting doll strategy," to help you effectively organize and safeguard your business interests, even in long-term care scenarios.
In this episode, we also delve into the intricacies of business succession planning. Discover how trusts can provide financial security for children who may not wish to run the business or have special needs, ensuring they receive income streams without losing government benefits. Learn about appointing trustees, selling the business for liquid assets, and using incentives to encourage family participation in your legacy. Plus, we highlight the vital role of operating agreements and insurance policies in securing the financial future of partners and their families. Whether you're focused on protecting your business during your lifetime or ensuring a lasting legacy, this episode offers a wealth of valuable insights and strategies.
Hi, I'm Greg McIntyre and we're going to talk about a topic that is near and dear to my heart and that I love to do. I know you do too, britton. I'm joined by my law partner, britton Begley, and we're going to talk about family businesses estate planning for family businesses. Our topics we're going to cover are LLCs and trust, business succession and what if the children do not want to run the business after you're gone? Can it provide a stream of income? Can it be sold? Can there be other plans in place and other strategies? The answer is yes. In Britain we help people all the time and we can really help. I love to help people do estate planning who have family businesses might be real estate. What are some other types of family businesses you've seen that we plan for?
Brenton Begley:Oh man, they run the Gambit. You know they really do Gambit, they run the Gambit. So Gambit is Gambit is. It's also X-Man character, one of my favorites. So they run the Gambit from farming operations to, you know, accounting firms law firms, by the way which you have to be a licensed attorney to do, and really can't do much accounting if you're not a CPA or have some background in accounting.
Brenton Begley:So professional firms family restaurants, boutiques I mean any type of business that you can think of that's not publicly traded could be what we refer to as a family business. And you know businesses are these things that they could be a side hustle that provides some type of income. They could be a legacy thing that's been handed down over the generations, or they could be that thing that the family depends on entirely for their income and for their ability to live right, so their livelihood. So what we want to focus on is making sure that those things pass in a smooth way, and there's many ways to do that.
Brenton Begley:But first we have to understand that if someone owns an interest in a business let's say someone owns a business entirely and they die then what typically happens by default is that business interest goes through a probate process, which can take anywhere from six months to two years to go through that process and can be tied up in the legal system before that business can be handed down to the next generation, and we want to avoid that danger. So kind of give an overall reason why we're talking about this and why estate planning is important for businesses. That's one of the things that we're looking at. Also, just knowing what's going to happen One of the important things about a business that you'll find is projecting what may happen in the future, whether that's financially or operationally, and so you need to know what may happen if a business owner dies. That's why this conversation is important and it applies to all sorts of types of business.
Greg McIntyre:Sure. So some of the ways that we set up estate plans with businesses are using tools like LLCs, sometimes LLCs combined with trust, so a trust that actually organizes the LLC and the trustee runs the business through the trust and everything is still passed through taxation. However, we could allow you to actually shift to an irrevocable trust and protect that business the asset in case of a long-term care situation. That can be extremely important as well. In case of a long-term care situation, that can be extremely important as well. So trusts give you a lot of flexibility there, using revocable, convertible or irrevocable trust, depending on your situation and what the future might hold, to make sure and what your asset level is, to make sure that you're protected from liability as well as any type of impending long-term care situation, that you can qualify for long-term care benefits but still keep the business and that would be extremely important so that the income could still flow to you from the business and so you could divert that income to another beneficiary, maybe a child or the child that helps you run the business and all that is allowable inside of the trust with the income coming out. So trusts are very flexible in allowing you to do that and depending on the makeup of your business.
Greg McIntyre:I love to do what I say is a Russian nesting doll strategy, so one doll inside of the other, with LLCs inside of trusts, especially if there's real estate involved and they're holding real estate.
Greg McIntyre:But it doesn't have to be just real estate and I have clients who will take five residential rental houses and put them in an LLC and then on the sixth one they'll start a new LLC or they might have one larger apartment complex inside of an LLC, all of which will be housed and controlled within the trust by the trustee, which is them.
Greg McIntyre:It might be a convertible trust so they can convert it to irrevocable and then shield all those assets in case of a long-term care issue and count them as separate assets, opening them up for qualification for a benefit like long-term care, medicaid to pay for nursing home care. And inside of that trust sprint we can also say what happens to the interest in the business once they pass away, because trust have beneficiaries and we can say exactly what the trustee is to do with those LLC business interest when the person passes away. So it gives us a lot of flexibility, because we were talking about the different options sell partner, keep running the business to provide an income stream to the children. Can you elaborate on that and how that might work after someone passes?
Brenton Begley:away. You mentioned a lot about protection and how assets can be protected within the trust during the life of the person who makes the trust or who owns the business. But another cool feature of the trust is that anything that's in that trust will avoid. You alluded to where the person who made the trust still has control over how that business is run, how the assets of the business are used, how the income of the business is diverted. So one thing that you could do if you're planning and let's say you know that one of your children is going to absolutely be able to run the business they have the aptitude, they have the desire and you want them to be your successor in running the business you could have them run that business. You could say in the trust that I want maybe the income to be provided to my spouse, a certain amount of the income, but I want this child to run the business and earn a good salary as well. Maybe you consolidate some of the shares in that individual immediately upon your death and leave some in the trust so that they do have voting power, they can make decisions with regard to the company, but maybe not all the decisions yet.
Brenton Begley:Maybe you want to still have the trust, have some control and whoever your trustee is, have that control. You could have a situation where you have a child that you want to have your assets. You want them to have this benefit that you've worked hard and created this business. You want them to benefit from it. Maybe they're not interested in running, maybe they don't have the aptitude to do it, maybe they're a special needs individual and just can't. In those situations they can still benefit from the business. You could, in fact, pick somebody to run the business, earn a salary and your loved one earn an income stream from that business and if they're a special needs individual, cool thing about the trust another one is that you know that income stream could go into a special needs trust for that individual where they can still get a benefit like a means-tested government benefit, like Medicaid or SSI, and still get the income stream from that business without it disrupting their ability to get that benefit.
Greg McIntyre:Very true. That's awesome. And then business succession we can have operating agreements with LLCs that also trigger upon the death of a partner, for example, insurance policies to buy out that person's percentage in the business so that you're not in partnership with someone's spouse or someone that you don't want to be in partnership with. Those things can be important to set up ahead of time to ensure the smooth running of the business, no matter if something happens to one of the partners or not, and also ensure that not only the business but the spouses are taken care of as well. So business succession planning is something that can be done. Those things can be done in combination. All these things can be done as part of a comprehensive strategy as well, and different events triggered at different points depending on what happens.
Greg McIntyre:I've got six kids. I don't know if any of them will ever be disabled. I hope not, but I'm not I'm not privy to that information when, when that might happen. So I might want to have a plan set up. Business succession planning really include my trust in that. And then I provide for a special needs sub-trust, supplemental needs sub-trust within my trust to receive benefits if one of my heirs my children becomes disabled later. So that is phenomenal, brenton, and I think trust, along with business succession planning, is a great comprehensive overall plan. What if the children don't want to run the business, though? What if they say you know, mom, dad, you know you guys blood, sweat, tears, worked your whole life to accumulate these things. We have no interest in doing it, because I want to go be a fashion designer in Paris, because I want to go be a fashion designer in Paris, right, yeah, so you know.
Brenton Begley:I would say that there are three ways that you can really go about doing that that I've seen and that we routinely set up whenever a child doesn't want to run the business, be a part of the business. One you can say hey, go live your dream. This business is going to be held in a trust. So it's held in an LLC right which protects the assets from your personal liability, and then that LLC is held in a trust that can control what happens when you die. So if I die, this passes along to my child. If they want to go be a fashion designer, go live your dream. I'm going to give you an income stream and I'll have someone else run the business. Be the trustee of that trust and coordinate. That trustee will get paid. You'll get paid as far as an income stream to you to help fund your dreams. That's option number one.
Brenton Begley:Option number two is hey, you know you have the ability to sell the business after you pass away. You could say, hey, if I don't, if my child doesn't want to run this, maybe I shouldn't keep this business right and business, and this is not appropriate for everybody. Some people want that legacy to go on beyond them, even if it's not their child running it. But for some people they don't have that desire. So you can say, hey, I built up this business. This business has assets, it has goodwill, it has a good name. I'm going to have this sold, liquidated, and that money go to my child or maybe be held in trust for my child, where they still get an income stream off of it.
Brenton Begley:And then option number three is you know, if you really want to incentivize a child to do what you think is the right thing for them, you could say, hey, this business is going to run.
Brenton Begley:It's going to run without you and, by the way, I'm not going to give you any interest in the business or benefit from the business unless you're a part of it, because this is my legacy that I want you to be a part of.
Brenton Begley:If you're going to live a life where you're not contributing to the family legacy, or maybe your own legacy or the potential I see within you as my child, then you don't get the benefit from the business that I work hard, blood, sweat and tears to build and leave behind for you. So those are the three options that I see the last one, it seems a little bit more, you know, I guess you could say strict or brutal, you know, in kind of the approach, but it's a good incentive and part of estate planning and doing a comprehensive estate plan for the future is to provide incentives for children or beneficiaries to act a certain way Right, we would do this all the time, like we provide money for education for children after you know a loved one passed away. That's to incentivize them to go seek further education so they actually make something of their lives.
Greg McIntyre:So you know, while it may seem like, I love that you don't pay them money to stay at home and not go to college. Right, exactly, that's not the prevailing wisdom. Right, you don't advise them to go play video games and just stay at home until they're five years old. Right, you might want to incentivize them to go to college, or I love, I love, your incentive. You know, some things that you said may seem strict and brutal up front also lay a path of opportunity that lays out what someone can do when they're ready, when they're ready to grab that ring, come in and run that business. Right, when they're ready. So I agree.
Brenton Begley:Maybe they need to go through some stuff. You know right when they're ready. So I agree, maybe they need to go through some stuff, you know, maybe they're just in a position in their lives where it's just not quite time. They don't know, they don't have the understanding, the you know, the the experience, and then you know, when the time comes, you know they can fulfill that role.
Greg McIntyre:These are the notes that I wrote down prior to starting this I'm going to. I'm ready to toss them because we killed that, that list Okay, there's so many. That and many other variables and options in between are the way that we sit down with business owners and do planning to protect your business during your life and pass it after you're gone and family members, or motivate family members or protect the business, or many, many other options I love doing it and I think too.
Brenton Begley:And I think too is like I feel like we're especially positioned to do this sort of thing because you know we happen to also run a business and have a lot of passion in what we do and plan for the future, and you know we're doing our own business planning every day, you know, on a weekly basis, and feeling the friction, feeling the experience, the journey of running a business and thinking about what's going to happen not only the next day but in the future, and so being able to have that conversation with a client and do that planning is one of the most fulfilling parts of the job.
Greg McIntyre:And I think we're uniquely positioned to help people avoid friction as much as possible. So you want a healthy amount of friction, but friction but not. You know, we know where those points are. Yeah, exactly, I mean, you know. Those are things that you and I both get better at every day, no doubt, and we both care about what we do. So I appreciate you, Brenton, and working with our business owners, and if you would like to sit down with Britton or myself or one of our attorneys and talk about protecting your business and leaving a legacy, give us a call. I would offer a free consult 1-888-999-6600, or you can schedule online and read a lot of great content about what we do at mcelderlawcom. That's mcelderlawcom, Thank you, Thanks.