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Planning Beyond Your Years

California is home to over 2,000 wineries, the majority of which are family owned and operated. Frequently, the name you see on the bottle is the name of the family that produced the wine inside. Wineries and winemaking tend to be family affairs, with the first generation hoping to pass the business along to succeeding generations. Despite the fairly common desire to keep a winery “in the family”, a surprising number of winery owners have engaged in very little if any planning and many do not yet have a business succession plan (“BSP”) in place.

A BSP details who, what, when, why and how the eventual change in ownership of a business shall be executed. There are three basic areas that a BSP addresses – ownership, management and taxes. Ownership and management are often not one and the same. If, for example, a business owner wishes to pass his or her winery down in equal ownership shares to each of three children, but only one of those children knows anything about the wine business, the BSP can provide that the winery shall be owned equally by the three surviving children, but all management decisions related to the winery shall be in the sole discretion of the one child who is familiar with the business.

Not having a BSP in place can result in major financial losses in the form of estate taxes (which, currently can be as much as 45% of a taxable estate) as well as the loss of the business itself, due to infighting among beneficiaries. Upon a business owner’s retirement or death, a BSP helps keep the business running smoothly during the transition period from the retired/deceased owner to the new owner by specifying the retiring/deceased owner’s wishes via various legal documents, including those comprising a comprehensive estate plan and those needed for the business itself. A winery owner should consider having an estate plan that includes a revocable trust as well as a pour over will. These are complex legal documents that determine how an individual’s estate is treated upon death. Business documents that most winery owners should have in effect include a buy/sell agreement, a life insurance policy to fund the purchase price within the buy/sell agreement and a shareholder agreement. All of the above documents can work together to effectuate a winery owner’s wishes regarding the disposition of the winery upon the owner’s retirement or death. Note that if the above documents are not drafted simultaneously, it is imperative that any owner periodically have his or her documents reviewed to ensure the documents will effectuate in a consistent manner, his or her wishes.

Stay tuned as we will have periodic updates on the importance of a BSP (especially when coordinated with estate planning goals) and the potential pitfalls of putting off the need for these important planning tools.

– Posted by Ziyad Naccasha

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