United States: Manufacturing And Distribution Group Newsletter – Fall 2019

Estate Planning and Business Succession Planning: The Lines Blur When a Family Business Comes Into Play

Brandon Vahl, CPA, CFE

For many business owners, estate planning and succession planning go hand in hand. If you are the owner of a closely held business, you likely have a significant portion of your wealth tied up in the business. If you do not take the proper estate planning steps to ensure that the business lives on after you are gone, you may be placing your family at risk.

Separate ownership and management succession

One reason transferring a family business is such a challenge is the distinction between ownership and management succession. When a business is sold to a third party, ownership and management succession typically happen simultaneously. But in the family business context, there may be reasons to separate the two.

From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing estate taxes. On the other hand, you may not be ready to hand over the reins of your business or you may feel that your children are not yet ready to take over.

There are several strategies owners can use to transfer ownership without immediately giving up control, including:

  • Placing business interests in a trust, family limited partnership (FLP) or other vehicle that allows the owner to transfer substantial ownership interests to the younger generation while retaining management control;
  • Transferring ownership to the next generation in the form of nonvoting stock; or
  • Establishing an employee stock ownership plan.

Another reason to separate ownership and management succession is to deal with family members who are not involved in the business. Providing heirs outside the business with nonvoting stock or other equity interests that don't confer control can be an effective way to share the wealth while allowing those who work in the business to take over management.

Work around conflicts

Another unique challenge presented by family businesses is that the older and younger generations may have conflicting financial needs. Fortunately, several strategies are available to generate cash flow for the owner while minimizing the burden on the next generation. They include:

  • An Installment Sale of the Business to Children or Other Family Members
    This provides liquidity for the owners while easing the burden on the younger generation and improving the chances that the purchase can be funded by cash flows from the business. Plus, as long as the price and terms are comparable to arm's-length transactions between unrelated parties, the sale shouldn't trigger gift or estate taxes.
  • A Grantor Retained Annuity Trust (GRAT)
    By transferring business interests to a GRAT, owners obtain a variety of gift and estate tax benefits (provided they survive the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owners' children or other beneficiaries. GRATs are typically designed to be gift-tax-free.
  • An Installment Sale to an Intentionally Defective Grantor Trust (IDGT)
    This is a somewhat complex transaction, but essentially a properly structured IDGT allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once the installment payments are complete, the business passes to the owner's beneficiaries free of gift taxes.

Because each family business is different, it is important to work with your estate planning advisor to identify appropriate strategies in line with your objectives and resources.

Get an early start

Regardless of your strategy, the earlier you start planning the better. Transitioning the business gradually over several years, or even a decade, or more gives you time to educate family members about your succession planning philosophy. It also allows you to relinquish control over time and to implement tax-efficient business structures and transfer strategies.

Controlling Your Unemployment Expenses

Seamus Donoghue, CPA, MST

The manufacturing sector tends to spend a lot on salaries and bonuses. Therefore, federal and state unemployment insurance can represent a significant cost of doing business. Fortunately, your management team can take proactive measures to help lower this cost, which varies depending on your work states, employment history and management practices. Here's what you should know.

The basics

Unemployment insurance provides a temporary weekly benefit to qualified workers who lose their jobs through no fault of their own. Funding for the state and federal portions of the unemployment insurance system is drawn from payroll taxes imposed on employers under the State Unemployment Tax Act (SUTA) and the Federal Unemployment Tax Act (FUTA), respectively.

Under the unemployment insurance system, individual states have the authority to do the following:

  • Administer the unemployment insurance system;
  • Establish eligibility rules;
  • Set regular benefit amounts; and
  • Pay benefits to eligible people.

Each state sets a tax rate schedule and a maximum amount of wages that is subject to taxation. Currently, the state wage base ranges from $7,000 in Arizona, California, Florida and Puerto Rico to $46,800 in Hawaii. The average tax rate also varies from state to state. Therefore, just because your state's wage base is higher than another state's, it does not necessarily mean that you will pay more in state unemployment taxes.

For example, although California's unemployment tax wage base is only $7,000, the average employer in California contributed 4.33% of taxable wages to the state's unemployment program in 2018. By contrast, the average employer contribution rate in Hawaii was only 1.01% of taxable wages in 2018.

Since 1983, the FUTA tax rate has been 6% of a maximum of $7,000 in covered wages per employee per year. Employers may be eligible for a maximum FUTA credit of 5.4%, resulting in a normal net FUTA rate of 0.6%, or $42 per year for each employee earning at least $7,000 annually.

Estimating your cost

In most states, established businesses will be assigned an "experience rating" from the state. That rating determines your state unemployment tax rate.

Your company's experience rating and, therefore, its tax rate may be influenced by the number of former employees who have filed unemployment claims with the state, the number of your current employees and your company's age. Typically, the more claims made against your company, the higher your premiums climb. Conversely, your company will pay state unemployment tax at a lower rate if your company's involuntary turnover rate is lower.

Some states may allow employers to buy down their unemployment tax rates. Businesses that recently acquired another may also be able to use the acquired company's unemployment tax rate, or request the transfer of the previous company's unemployment reserve fund balance.

In addition, you can follow these best practices to help lower turnover and, thus, lower unemployment taxes:

  • Hire new staff conservatively;
  • Consider using temporary workers, part-timers and contractors during peaks, if possible;
  • Remedy workplace conflicts and keep a worker;
  • Assess candidates with standardized testing before hiring them; and
  • Conduct ongoing staff training to enable employees to succeed.

If you must terminate an employee, consider giving that individual a severance payment as well as offering outplacement benefits. Severance pay may reduce or delay the start of unemployment insurance benefits. Plus, effective outplacement services may hasten the end of unemployment insurance benefits because the claimant has found a new job.

Cost-analysis study

A cost-analysis study, which can be performed with the help of your CPA, will enable you to assess via black-and-white projections whether increasing your payroll is worth the investment. If it is not financially attractive to add staff, consider other options.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions