Preventing Feuds in the Family Business

Tax Planning

Tax Planning

Tax planning must deal with the only two certain things in life: death and taxes.

In the transfer of ownership of a family business, your family must consider not only estate taxes, which may be imposed upon your parents' death, but also the income or capital gains taxes that Uncle Sam and the states will want to impose when your dad cashes out of the business while he is alive.

A word of caution at this point: While it's a great idea to work with professionals to help you handle the family and succession planning issues, it is mandatory, in my opinion, that you have a knowledgeable tax advisor to help you and your family successfully navigate the stormy waters of tax law.

Let's look at just one tax trap that you and your family could innocently fall into. Let's assume that you and the other family members decide that the best way to take care of your parents is to give your dad a lump sum payment for his stock in the company. Your dad will then take this lump sum money and invest it in order to comfortably live off the investment income.

Sounds like a plan, right? Wrong.

When your dad starts to complete his tax return for the year after the sale, he quickly finds out that the lump sum payment he received has resulted in his owing a huge tax bill that wipes out a significant amount of his portfolio. Worse yet, his tax advisor then tells him that the family may incur an enormous estate tax bill after both he and your mom die.

Fortunately, there are many legally sound and acceptable tax-planning strategies that family businesses can adopt that will allow the transfer the ownership of the business from one generation to the other while at the same time minimizing income taxes, capital gains taxes and estate taxes.

The main point to remember when dealing with tax-planning issues regarding your family business is that seeking sound tax advice isn't everything-it's the only thing.

It takes a lot of wisdom and courage to bring up the dreaded R word in a family business when the founders of the business get up in years. Successful transitions of family businesses can be difficult and, at a minimum, require careful consideration of family, succession planning and tax-planning issues and typically require the advice of trusted and knowledgeable advisors to help the family members reach a win-win plan that not only rewards the founding generation for a job well done, but also gives the next generation the opportunity to take the family business to the next level.

So good luck in your efforts, and always remember that blood can be thicker than money.

Note: The information in this column is provided by the author, not All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.

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Chris Kelleher is an award-winning small-business advisor and attorney. He's also a sought-after speaker and the founder and resident legal guru of The Law Firm For Businesses, a boutique law firm that helps business owners creatively solve their business and legal problems.

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