In this article, you will discover:
- Why adequate tax planning is necessary and significant for family-owned businesses in Texas.
- The benefits of Partnerships and LLCs as ownership structures for family-owned businesses in Texas.
- The benefits of funding the transfer of family-owned businesses with your life insurance.
Why Is Proper Tax Planning Important For Family-Owned Businesses In Texas?
Adequate tax planning is an essential aspect of family-owned businesses in Texas. If you or your family own a business, it is necessary to plan for how you will pay your taxes to prevent you from having to sell assets to cover such tax obligations.
While federal exclusions may apply in some instances, more often than not, the complex nature of business structures and family dynamics can lead to challenges that ultimately result in liquidation. Two situations cause primary challenges:
- Diverging objectives and interests: Divergence in the interests and objectives of the beneficiaries or partners of family-owned businesses in Texas can cause a significant challenge that ultimately results in liquidation. For instance, complications arise if half of the beneficiaries want to sell the business, while the other half express a keen interest in keeping it operational.
- Number of Beneficiaries: Family-owned businesses with multiple beneficiaries will often be more susceptible to the challenge of divergent opinions, making consensus harder to achieve. As such, the higher the number of beneficiaries, the harder it is to have an agreement leading to potential liquidation of assets.
Effective tax planning will not only help safeguard a family-owned business against threats of asset liquidation, but will also foster family harmony by ensuring that all viewpoints are considered and addressed for unanimous decision-making.
How Important Is Determining The Ownership Structure For A Family Business In Texas?
Another essential aspect of estate and tax planning in Texas is the determination of the ownership structure of a family-owned business at the time of the death of a major partner. Whether or not the business is transferred to a trust controlled by a trustee is dependent on the ownership structure adopted by the family-owned business.
In Texas, most businesses favor partnerships or Limited Liability Companies (LLCs), which are the most prevalent. For instance, one of the biggest ranches in Texas, the King Ranch, is a limited partnership with over a thousand limited partners.
With direct ownership of property or a business, the individual reserves the right to sell at their discretion. In comparison, partnerships and LLCs restrict this ability. Therefore, when business assets or property cannot be partitioned equally among the beneficiaries, partnerships and LLCs help avoid forced sales and maintain the underlying business’s integrity.
Adopting a partnership structure solves the challenges involved in family-owned business tax planning. This is done by enabling the consideration and management of all the beneficiaries’ diverse interests and objectives through effective governance.
Businesses in Texas can also adopt the Series LLC, which is a business structure mostly adopted by farms, ranches, and other businesses. The Series LLC allows for the creation of multiple series, each with its own assets, liabilities, and members within one entity. In this way, the business can segregate assets and cover multiple interests and objectives by operating multiple businesses under one parent company.
Adopting the Texas Series LLC business structure limits the beneficiary’s ability to abruptly liquidate their shares. Instead, to be able to sell your shares, you must offer them to another member first so that their specific interests cannot be sold. This structure limits hasty sales while promoting stability within the LLC.
Are There Tax Incentives For Transferring Family-Owned Agricultural Property In Texas?
Transferring a family-owned business or property at the time of retirement can also lead to significant tax liability and deductions. You can avoid these taxes by taking advantage of specific tax incentives that allow for transferring family-owned agricultural property or farms while providing opportunities to minimize tax liability.
The goal of this tax incentive is to safeguard the business’s valuable assets against being included in your taxable estate at the time of retirement. One of the most commonly adopted strategies is the use of buy-sell agreements.
A buy-sell agreement will allow you to sell your business to your children or potential beneficiaries through a gradual purchase over several years. This gradual purchase ensures that you secure a significant retirement income for your beneficiaries that is free from tax liabilities.
Adopting a comprehensively crafted buy-sell agreement is another key part of adequate tax and estate planning that can prevent issues related to asset distribution at the parent’s time of death. Further, provisions like reclamation clauses can be incorporated into the buy-sell agreement to address potential payment failures and add another layer of protection for the deal.
Can I Use My Life Insurance To Fund The Transfer Of A Family-Owned Business Or Farm?
One of the best ways to fund the transfer of a family-owned business or farm is through the use of your life insurance. Integrating life insurance into the entity to buy out other parties is a sound strategy. It provides immediate liquidity which can be beneficial for covering financial contingencies and risks. In addition, it ascertains financial security for the remaining family members among many other benefits.
Integrating your life insurance, however, is not as easy and straightforward a decision as giving your assets away or giving your business to your kids. It is a much more complex strategy that needs to be implemented in a comprehensive manner. There are multiple solutions, depending on what you want to accomplish.
For instance, your transaction may include the transfer of an ongoing business or asset, as well as estate tax, gifting tax, charitable giving, and estate planning. Funding the transfer using insurance proceeds requires the adoption of a holistic approach that considers all the relevant factors simultaneously. In such a scenario, you should conduct a comprehensive evaluation and discussion of all issues, including:
- Estate planning
- Tax planning
- Gifting strategies
- The dynamics of your business operations
- And more…
An example of this scenario is the complexity in planning that would be required in a blended family where the two spouses have a significant age difference. The deceased husband may have left his LLC-structured rental properties in a trust until the death of his surviving spouse, with a directive outlining a gradual transition of income distribution to their beneficiaries over several years. However, the changing circumstances when his widow suddenly desires to sell the property requires careful planning and consideration of all factors and parties involved.
Ultimately, as a result of the dynamic nature of estate planning, it is essential to anticipate and consider the immediate and long-term impacts of the strategy you choose. It is prudent not only to factor in potential future implications like fluctuations in property value, but also to incorporate exit strategies into the planning to mitigate against any potential risks.
For more information on Estate Planning For Family-Owned Businesses In Texas, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (972) 366-7201 today.
