Business Issues

Succession Planning

According to a 2014 Financial Planning Association Survey, the greatest financial challenge facing small business owners is developing a retirement plan and exit strategy.

Studies indicate that in 85 percent of family businesses, a family member has been identified as a successor. In reality, however, only 30 percent of family businesses transition to the second generation and just 10 percent to the third generation, according to the Fox Family Enterprise Center.

Ernst & Young reports that 65 percent of family business owners plan to transition out of their role within the next five years and do not have a formal succession plan. Since entrepreneurs are common in real estate, this issue will affect many of them soon.

However, if done with thought and consideration, succession planning can ensure family harmony, protect a surviving spouse, safeguard assets from creditors, and preserve family wealth.

Maintaining Wealth

The first step is for the retiring business owner to determine what he or she needs for living expenses and what percentage will come from the family business. Once that is accomplished, the discussion with the next generation of the business can occur.

Many business owners attempt to treat all children fairly, but each child may not have a stake in the business. For example, a daughter who is a doctor and has no interest in the business may be given some cash and a minimal number of shares of stock. That differs from a son who has worked in the business, views it as his career, and wants to run it.

Finally, the business owner will want to minimize federal and state taxes, so tax implications need to be fully vetted with the appropriate professionals, such as attorneys, accountants, or financial planners who are assisting the business owner in developing the succession plan. 

Overcoming Obstacles

Transitions of family businesses can be tough. Family disputes can arise, owners may lose control, and taxes may be higher than expected.

Various methods exist for transferring a family business, including gifts of stock, sale of stock, trusts, recapitalization, and limited partnerships. 

Gifts of stock are used when the business owner doesn't need the income from stock. The gifts are outright with either voting or nonvoting stock. If voting stock, no limits exist on the new owner. If nonvoting, the initial business owner controls the vote, but the new owner shares in dividends.

The sale of stock occurs to provide the business owner with compensation. It can be the outright sale of voting or nonvoting stock.

Controlling Assets

Trusts make sense when it's beneficial to separate benefits received and control of the company. Trusts can control the transfer and timing of wealth and can include the back door prnuptial agreement, which precludes in-laws from having access to the business assets and a say in running the company.

The type of trust varies and may include a Crummey trust, an intentionally defective grantor trust, a grantor retained annuity trust, recapitalization, or a family limited partnership.

A Crummey trust is for the child's benefit. The business owner ceases to have access to the stock, the child has limited access, and a trustee votes the shares. Its features include protecting assets, maintaining wealth in a controlled environment, and keeping the child from voting.

An intentionally defective grantor trust is funded with at least 10 percent cash. The trust buys stock and pays with a promissory note, so the business owner receives income from the note. Asset protection is built in because the trustee votes the shares, the trust can accumulate income tax free, and the business owner obtains a revenue stream.

A grantor retained annuity trust is created, and stock is transferred into it. For a fixed term, the business owner receives an annual annuity. At term end, the children receive the stock in the GRAT. 

Recapitalization is another method used when estate planning is a priority and it freezes the value of the interests owned. Common stock is exchanged for preferred stock. The common stock is gifted to the children, and the business owner keeps the preferred stock and the cash flow. The purpose is to shift future growth to the children.

And finally, a family limited partnership may be used when there's a desire to maintain control over the gifted stock, protect assets, and place limits on voting. The stock can be placed in a limited partnership and then gifts of limited partnership interests are made to the next generation.

Planning Ahead

Succession planning involves many issues and multiple transfer strategies. Transfer strategies involve estate planning, asset protection in case of divorce or general creditors, income taxes, and estate taxes.

The above is only a summary, so always seek professional advice to make the right decisions about transferring your business to the next generation. Start planning now, so your family business can be successfully transitioned to the second and third generations.


Mary Stark-Hood, JD, CFP, is president of the Hood Group, Inc., and serves as a consultant to the CCIM Foundation. Contact her at

This article is sponsored by the CCIM Foundation @


Creating Opportunities Out of Adversity

Fall 2021

The anxiety resulting from COVID-19 is a barrier that must be addressed and overcome to find the opportunities and succeed.

Read More

New Year, New Approach to Budgets

Winter 2021

Considering the volatility and uncertainty of 2020, budgeting for the new year will require more than business as usual.

Read More

Negotiating Difficult Deals


For advisers to less experienced investors, the commercial real estate transaction remains all too human. It’s their job to navigate through the emotions, the competing interests, and the miscommunication to get to that closing.

Read More

Business Aviation


Private aviation can help real estate professionals use time more efficiently while building relationships and close deals outside of their local markets.

Read More