Woburn Business Succession Planning Attorneys

By Michael Monteforte, Jr.

Most business owners we meet in Woburn have spent twenty or thirty years building something, and about twenty minutes thinking about what happens to it when they stop. Not because they do not care. Because the business always needs something today, and succession is a problem for a version of you that feels a long way off.

It usually is not. And in Massachusetts, the business itself is often the reason a family ends up with an estate tax bill they never saw coming.

Your business is probably your estate tax problem

Massachusetts taxes estates over $2 million. That threshold counts everything you own — your house, your retirement accounts, life insurance you own outright, and the value of your business interest.

A business owner with a company worth $3 million is already past the threshold before the house is counted. Most owners have never had the business formally valued, so the number in their head is not the number the Commonwealth will use.

There is a second trap that catches married couples, and it catches them because of something they read about the federal estate tax. At the federal level, an unused exemption is portable — a surviving spouse can carry over what the first spouse did not use. Massachusetts has no portability. None.

So if everything passes outright to a surviving spouse and no planning is in place, the first spouse’s $2 million Massachusetts exemption is simply gone. With planning, a married couple can shelter up to $4 million. Without it, half of that protection disappears at the first death — and nobody finds out until the second one.

If you want to see roughly where you stand before we talk, our Massachusetts estate tax calculator will give you an estimate in a couple of minutes. It is free, it asks for no email address, and it will include the business value if you enter it. More on how the tax itself works is in our Massachusetts estate tax guide.

A hypothetical example

The following is an illustration only. It is not a real client and it is not a prediction of any particular result.

Imagine a married couple in their early sixties. One of them owns a contracting business an appraiser would value at $3 million. They have a home worth $900,000 with no mortgage left, and about $800,000 between two retirement accounts. By their own reckoning they are “comfortable, not wealthy” — and they have never had the business valued.

Their Massachusetts taxable estate is roughly $4.7 million. The business alone puts them past the $2 million threshold with $1 million to spare. If their plan leaves everything outright to the survivor — which is what most simple wills do — only one $2 million exemption is ever used, and the other is lost. Their children inherit a tax bill on money the family could have kept, and the only asset large enough to pay it is the business.

Run your own numbers through the calculator and you will see the same arithmetic against your figures rather than these.

The four ways a Massachusetts business changes hands

Every succession plan is some version of one of these. They have very different tax, timing and family consequences, and the right one depends on who actually wants to run the business — which is not always who you assume.

Sale or transfer to family

The most common intention and the one that fails most often, usually because the child who is expected to take over has never been asked directly, or because one child works in the business and two do not. Splitting ownership equally between children who are not equally involved is how families stop speaking to each other.

Sale to a partner or key employee

Often the cleanest outcome for the business and the hardest to fund, because the buyer rarely has the cash. This is where a properly funded buy-sell agreement does the heavy lifting.

Sale to a third party

Usually produces the most money and the least continuity. Worth planning for years ahead, because a buyer pays more for a business that does not depend entirely on the owner being there.

Gradual transfer during your lifetime

Moving ownership out in stages, often into trust, so growth in the value of the business happens outside your taxable estate rather than inside it. This is the one that has to start early to work at all.

What a buy-sell agreement actually does

A buy-sell agreement is the instruction manual for what happens to an ownership interest when something changes. Most owners have heard the phrase. Far fewer have one that is current, and a surprising number have one that was drafted when the business was a fraction of its present size and has never been looked at since.

A workable agreement answers four questions:

• What triggers it — death, disability, retirement, divorce, bankruptcy, or a partner simply wanting out
• Who buys — the remaining owners, the company itself, or a named successor
• How the price is set — a formula, a fixed value revisited annually, or an independent appraisal at the time
• Where the money comes from — the single question that decides whether the agreement is real or decorative

An agreement with no funding behind it is a promise that the surviving owners will find several hundred thousand dollars at the worst possible moment. That is not a plan.

Paying the tax without selling the business

Here is the situation that keeps business owners awake once they understand it. The estate tax is due within nine months of death. The business is worth millions on paper. There is no cash.

Families in that position sell the business, and they sell it fast, which means they sell it badly. Everyone in the market knows why it is for sale.

Life insurance held in the right structure solves this, because it delivers cash exactly when the tax is due. Held in the wrong structure it makes the problem worse — a policy you own outright is counted in your estate and taxed along with everything else. An irrevocable life insurance trust keeps the proceeds outside your taxable estate, so the money that pays the tax is not itself taxed.

Moving a growing business out of your estate

If your business is worth $3 million today and growing, the problem gets bigger every year you leave it alone. Every dollar of future growth accrues inside your taxable estate.

Several tools move that growth outside it. A grantor retained annuity trust can lock in today’s value and pass the appreciation to your children, and it works particularly well for a business expected to grow faster than the IRS assumed rate. Sales to intentionally defective grantor trusts and staged gifting of minority interests do related work.

None of these are products we sell off a shelf. Which one fits depends on the business, the family, and how much time there is — which is the honest reason to start this conversation earlier than feels necessary.

What happens if you do nothing

An ownership interest held in your own name passes through probate like any other asset. While that runs, nobody has clear authority to sign for your share. Contracts stall. Banks freeze lines of credit. Key employees start taking calls from competitors, because uncertainty is the one thing a good employee will not sit through.

If you have partners and no agreement, they may find themselves in business with your spouse or your children overnight. That is rarely what anyone wanted, including your family.

And the tax is still due in nine months, whether or not anyone can sell anything.

After the owner dies, someone has to administer it

If the plan works, ownership lands where it was meant to land — often in a trust. Somebody then has to actually run that trust: value the interest, deal with the other owners, handle distributions, and file the returns. That job has real legal exposure, and the person holding it is usually a family member who has never done it before. We cover what it involves on our trust administration page.

Working with Woburn business owners

Our office is on TradeCenter Drive in Woburn, off Route 128, and a good share of our clients run companies within a few exits of it — contractors, medical and dental practices, manufacturers, restaurants, professional firms, family businesses now in their second generation. We also serve the surrounding towns: Winchester, Wakefield, Wilmington, Burlington, Stoneham, Lexington, Arlington, Belmont, Medford and Melrose.

We are an estate planning and elder law firm, not a general practice. That matters here in one specific way: your business is one asset inside a plan that also has to deal with your home, your retirement accounts, the cost of long-term care, and what happens if you become unable to run things before you die. A succession plan built in isolation from the rest of that tends to solve one problem and create two.

The first step is a free consult call. Fifteen minutes with Nicole Ott, our Lead Intake Coordinator, to understand your situation and work out whether we are the right firm for it. No charge and no pressure.