David McKelvey, Friedman LLP

Running a business in real estate and construction rarely corresponds neatly with the calendar. Shifts in seasons, economic conditions, and even policy decisions affect business profitability and what an owner needs to consider as they plan ahead.

With the end of the year around the corner and tax season ahead, we recommend that those who have founded or built a successful business of their own create (or review) their estate and succession planning. In particular, there are three major issues to consider: Planning for now, for the immediate future, and over the long-term for both your business and family.

Planning Your Success

It’s natural for business owners to want to share their profits and line of work with their families. Particularly for those with children reaching adult age, there are steps they can take to make sure their families sustain their wealth.

We often encounter clients who want to transfer some of their wealth but not overwhelm their children; they also want to continue to grow their own wealth. One great strategy is that for every new deal or project completed, an owner should put 50% of the resulting interest into a tax-paying family trust assigned to their children, and allocate the remaining half to themselves. Many industry families own annuity-bearing assets — that is, properties that provide a steady cash flow – so it’s best to plan how to allocate those proceeds up-front.

Policy changes make it equally important to review and adjust your planning. For instance, the rules that govern the valuation of gifts will change significantly beginning in 2017. New IRS regulations will begin to limit how much owners can value an asset for tax purposes when transferring that asset as a gift to a relative. The resulting credit for passing along an asset as a gift will be lower, which should cause local businesspeople to rethink their current gifting strategies.

What’s Next?

The decision to move on from full-time stewardship of a business  shouldn’t be taken lightly, as there are intricate and complex issues to address. Will I retain ownership? How will my family be affected? Corporate governance becomes very important.

For those in the construction business, it’s much easier to involve descendants in their work. Most projects are cyclical and job specific, so an owner can make sure their descendant learns different tasks one at a time and develops a thorough understanding of the industry. Our local clients frequently walk children through different tasks, ranging from framing and design to business management and negotiations with subcontractors. Similarly, for specific licensing needs, it’s much better to help a future owner meet those requirements while their parent is still working (and can pass along valuable wisdom).

Not all children want to be a part of the business, however, and estate planning can make a difference. If your goal is to pass down profits or partial ownership of your company, you also need to account for marriage  (or, unfortunately  divorce). Trusts are a great way to ensure that specific assets are allocated to a child, but excluded from any proceedings where they may need to divide assets with an estranged significant other. Conveniently, this also protects ownership should one sibling decide to enter the family business later than another.

Ownership discussions shouldn’t be overstated; even if a businessperson wants to take a step back from the day-to-day, they can remain in control while their descendants ease into their professional responsibilities. We advise clients to remember that it is always easier for the company to change ownership details while they are living; it can make more sense to keep voting interests of a business in their control in case things go wrong or a child is not the right person for the job.

Down the Line

The ups-and-downs of the business necessitate that a firewall be built between the business and the finances of an owner’s children. Even if the children are the right leaders for a company once an owner has passed away, a bad business cycle must not take the entire operation into the red. For this reason, we build in cash-flow expectations and business needs (such as payroll, investment, and rent) into planning documents.

For instance, in the event of a downturn, a trust can revert to interest-only payments on assets it purchased from the founder or the estate. In subsequent years, when business picks up, you can make up for any lost income that should have been paid out.

Most importantly, we advise clients to practice a form of “kitchen-table economics.” Owners should unambiguously explain their wishes to their descendants as well as how they’ve structured their financial planning, and how to monitor the finances of the business. The only thing founders are more proud of than a successful business is their ability to provide for future generations. That’s a future that’s surely worth building the right way.

David McKelvey is a tax partner- Long Island tax group leader at Friedman LLP, Uniondale, N.Y.