Interview with a Tax Lawyer: Insights for Family Businesses Eyeing Generational Handover

October 17, 2023

Family businesses often stand as a testament to the enduring spirit of entrepreneurship, weaving a rich tapestry that intertwines professional achievement with familial bonds. As these enterprises contemplate passing the torch to the subsequent generation, a myriad of considerations come into play, with tax implications being a pivotal aspect. Today, we delve into an insightful conversation with Matt Wildes, a Lawyer and CPA with Wildes at Law, exploring the intricate tax landscape that family businesses navigate during generational transitions.

Q1: Understanding the Landscape

Q: In the context of family businesses transitioning leadership and ownership to the next generation, could you shed light on the general tax landscape and its potential impact on such transitions?

A: The tax landscape can be quite complex in the context of family businesses transitioning leadership and ownership to the next generation. The potential impact varies based on the business structure, size, and the specific assets involved. Generally, such transitions can trigger capital gains taxes, gift taxes, estate taxes, and income taxes, all of which must be carefully considered in the planning process. By consulting with a tax professional beforehand to evaluate these considerations, they can help plan and structure transactions to minimize any tax consequences. The common mistake is for the transaction to happen and hoping the tax professional can minimize the impact. However, it might be too late to save the most money.

Q2: Tax Liabilities and Mitigation

When a family business undergoes a generational shift, what are the typical tax liabilities they might encounter, and what strategies might be employed to mitigate these?

Typical tax liabilities during generational shifts may include capital gains tax on the sale of assets, gift taxes on large transfers, and estate taxes on the estate's value. Strategies like gifting in annual exclusion amounts, establishing family-limited partnerships, or using valuation discounts can be employed to mitigate these liabilities. Additionally, lifetime gift and estate tax exemptions can help reduce the overall tax burden.

Q3: Estate Tax Considerations

Estate tax often becomes a focal point in discussions about generational transitions in family businesses. How can estate tax affect the transfer of business ownership within a family?

The value of the business, coupled with the size of the estate, determines the potential estate tax liability. If the estate tax becomes too excessive, that may result in the need to liquidate assets to pay the liability. This liquidation of assets can then create a snowball effect of more taxes due on the liquidation. The forced sale of assets may limit the ability of the business to operate before the transfer because of the drain of capital available to the business.

Q4: Gifting Shares

Many family businesses consider gifting shares to transition ownership to the next generation. What are the tax implications of this approach, and are there optimal strategies for executing it?

Gifting shares can be an effective way to transition ownership, but it comes with gift tax implications. Annual exclusion gifts, the lifetime gift tax exemption, and valuation discounts for minority interests can help minimize the tax impact. Careful planning and professional advice are essential for executing this strategy effectively.

Q5: Selling vs. Transferring Ownership

When contemplating the future, some business owners might weigh selling the business against transferring it to heirs. How do these two paths diverge from a tax perspective, and what should business owners consider?

Selling the business and transferring it to heirs differ from a tax perspective. Selling generates capital gains tax, while transferring may trigger gift and estate taxes. The factors to consider are 1) different tax rates between gift taxes and capital gain taxes, 2) the expected size of the estate, and 3) the expected time and amount to be transferred. Business owners should weigh these factors alongside their financial goals and family dynamics when deciding which path to pursue.

Q6: Leveraging Trusts in Transition

How can family businesses utilize trusts in their succession planning to optimize tax efficiency and ensure a smooth transition of control and ownership?

Trusts are valuable for optimizing tax efficiency and ensuring a smooth transition. Options include grantor-retained annuity trusts (GRATs), family limited partnerships (FLPs), and irrevocable life insurance trusts (ILITs). Trusts can help reduce the taxable value of assets and provide a structured framework for passing down control and ownership. The best option will vary depending on the facts and circumstances.

Q7: The Role of a Tax Professional

Could you elaborate on how engaging with a tax professional, like a CPA or tax lawyer, can assist family businesses in navigating the complexities of tax planning during a generational transition?

Engaging a tax professional, such as a CPA or tax lawyer, is crucial. They can offer specialized expertise in tax planning, help you navigate the complex tax code, and provide tailored strategies to minimize tax burdens. Their guidance is essential for ensuring that the transition is as tax-efficient as possible.

Q8: Real-life Scenario:

Could you share a real-life scenario where strategic tax planning was crucial in facilitating a smooth and financially sound transition in a family business?

In one such scenario, a business owner established a Family Limited Partnership with a management company to operate the limited partnership and other assets. These businesses had voting and non-voting ownership interests. The business owner sold ownership interest in the family limited partnership to his daughter at a reduced price because of valuation discounts, which were taken advantage of. By implementing this strategy, the business owner saved hundreds of thousands of dollars, which the daughter could use to operate the business more efficiently.

Q9: Key Takeaways

As we wrap up our discussion, what key takeaways or general advice would you offer to family businesses in the early stages of planning for a generational transition?

For family businesses planning a generational transition, key takeaways include:

  • Start early and seek professional advice.
  • Consider gifting strategies, trusts, and valuation discounts.
  • Assess the family's dynamics and financial goals.
  • Plan for contingencies, like unforeseen tax law changes.
  • Maintain open communication with all family members involved.

Q10: Future-proofing the Business

Lastly, how can the next generation of family business leadership ensure they continue to navigate tax considerations effectively to safeguard the business's financial health?

The next generation can ensure effective tax management by staying informed about tax law changes, working with professionals, and reassessing the business's structure and ownership strategies. Emphasizing ongoing education, adaptability, and prudent financial planning will help safeguard the business's financial health and tax efficiency in the long term.


Navigating through the intricate web of tax considerations during a generational transition in a family business requires foresight, strategic planning, and, often, expert guidance. We thank Tax Lawyer/CPA Matthew Wildes for shedding light on this complex topic and providing family businesses with valuable insights as they contemplate crafting a legacy that endures generations.

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