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Tax Implications for Family Business Succession Planning in 2024 and Beyond
Just like individual family dynamics, every family business is unique, with different needs and requirements, necessitating bespoke solutions and approaches to succession planning. While succession planning is likely a source of ongoing conversations around boardroom and dining room tables alike, there are key factors related to wealth management that make 2024 a particularly pivotal year for family business succession planning.
Understanding the Impact of 2024 on Succession Planning
Family business succession planning is about more than just determining plans for corporate leadership; it also involves creating the strategies and approaches that maximize and preserve family wealth. With new changes for estate tax exemption on the horizon, the importance of thoughtful planning has only been amplified.
Looking ahead to the end of 2025, the lifetime exemption for the estate tax will be reduced from $13.61 million per person as of 2024 to $5M, adjusted for inflation, which is in line with the exemption levels before the Tax Cuts and Jobs Act (TCJA). Additionally, the current maximum 40% gift and estate tax rate is set to increase to 45% in 2026.
These changes have major implications for intergenerational wealth transfer, with many family-owned companies looking at different approaches to move shares, restructure ownership, and preserve wealth ahead of the tax deadlines. While the tax changes won’t go into effect until the end of 2025 and beyond, proactive families know that 2024 is the year for active planning.
Recently, a colleague and I had the opportunity to speak at Family Business Magazine’s Transitions West conference. One of the key topics of interest was how to sustain and support family-owned companies and family members through hybrid core-satellite business structures.
Core refers to a business that operates under a single entity through which family members can benefit. By placing core assets, such as the family’s shares in the enterprise, into a trust in which the family members are the beneficiaries, the company’s wealth can be moved outside of family members’ estates. This arrangement is beneficial in several ways, as it protects the wealth of the business from financial threats based on family dynamics, such as divorce or lawsuits against specific members, while also creating a path to avoid the 40% estate tax imposed on each generational transfer.
However, while this approach preserves and protects family business wealth, it can also have a limiting and sometimes stifling impact on the next generation as their ability to benefit from the trust is based on the allocation and approval of distributions. For entrepreneurial next-gen members, having to request capital and not gaining full access to their shares can not only be frustrating but can breed resentment that harms the operations of the enterprise and the harmony of the family.
An alternative to the core model is the satellite approach. In this arrangement, ownership and shares in the family business are distributed outright and are free of a trust. While this approach provides significant flexibility and ownership for each family member over their portion of the wealth, it can also create vulnerabilities. For example, a divorce, lawsuit, or bad investments can not only deplete personal wealth and holdings but also jeopardize the stability of the family business.
Given the various strengths and weaknesses of both the core and satellite approaches, proactive families should evaluate the benefits of hybrid solutions. In a hybrid structure, the majority of the shares for the primary business are put in a core trust, delivering increased safeguarding and oversight over the enterprise, as well as tax benefits. To provide autonomy and flexibility for family members, part of the shares and assets are structured in the satellite model, creating greater opportunities for individual investment and entrepreneurial pursuits. This hybrid approach helps ensure that bad luck and poorly performing investments don’t evaporate core wealth, while creating the autonomy that allows the next generation to advance their entrepreneurial and philanthropic priorities.
The impending changes to the tax code should be a rallying cry for any family-owned company that now is the time to think about succession planning and corporate structure. While these conversations and decisions can be daunting and complex, the right advisors can partner with various generations of the family to understand their financial and professional goals. Those thoughtful, strategic conversations can align them with the lifecycle and trajectory of the business to help ensure both the business and the wealth it creates continues to grow for generations.
About Whittier Trust
Whittier Trust’s mission is to build and sustain an accomplished, successful, and talented organization that is expert in guiding families through multiple generations–protecting and enriching a family’s legacy through diligence and integrity while educating the family’s future generations about their stewardship and the opportunities it encompasses. We have refined our singular focus on the business of wealth management since 1935. Today as a trust management company, Whittier Trust offers a breadth of financial services and expertise supported by an exceptional commitment to personal service reflecting our family office roots. We collaborate closely with our clients and their advisors to tailor investment strategies that meet their unique needs, goals, and values—in other words, we focus on what your wealth means to you.
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