By: Lauren A. Galbraith
Family wineries face certain common issues when it comes to succession planning, and there are steps you can take to help ensure the longevity and success of your brand and business.
Step 1 – Develop a Plan
Benjamin Franklin is thought to have said: “By failing to plan, you are preparing to fail.” This rings true for family wineries, where planning can substantially increase the odds of the business achieving its full potential over the long term.
Some forms of planning end up memorialized in legal documents. Thoughtfully drafted governing documents for the business lay essential ground work. For example, a shareholder agreement can establish a framework for the transfer of ownership within the family and restrict the sale of business interests to nonfamily members. The business’s governance and management structure can be tailored when it comes to, for instance, using a management committee or vesting control in single strong executive, setting the voting thresholds for approval of major decisions by owners, or instituting a family advisory board to help set goals and priorities for professional managers or to provide a mechanism for passive owners to have a voice.
A business leader helps to ensure stability for the business and its stakeholders upon his or her death or in the event of incapacity by having in place certain core estate planning documents such as a revocable trust, will, and power of attorney. Lifetime gifting may be part of a plan to minimize estate tax at the death of the senior owners such that the family has the freedom to continue as family-owned. In California, avoiding or deferring property tax reassessment can be an important objective to minimize future costs to the business.
In transferring business interests, some families choose to align controlling ownership with successor management. To the extent one can discuss these matters and the rationale for certain decisions in advance of the decisions taking effect, it can help to preserve family harmony and avoid conflict and resentment among the next generation after a death.
Identifying talent and cultivating future leaders is an important part of the planning process. This leads to the next topic of taking steps to encourage full and frank communication.
Step 2 – Open Communication Channels
An important step of family business succession planning is to examine the desires and expectations of next generation, as well as their strengths and weaknesses. Some children readily see the business as their family legacy and relish the opportunity to continue its growth. Others view it as a family legacy that they are honor bound but not excited to inherit. Still, others see it as an asset to be sold as soon as the parents are deceased to provide the capital to pursue the children’s true career objectives. Before moving forward with a family-based succession plan, parents should seek to ensure they are getting an honest answer from their children as it relates to taking over the family winery.
A coach or consultant may be retained to conduct family interviews and synthesize findings into a plan of action. Coaches can also help family members develop communication skills to improve how they work together, such as effective listening, understanding and responding while not shrinking from difficult conversations.
A collaborative and diplomatic style can feel unnatural to a strong, independent leader. But a pivot in approach may be what enables longevity. Sustainable solutions are more likely to be designed in environments in which individual values and aspirations are expressed. Relatedly, a leader must learn to let go and, at some point, allow for transition of real management and decision-making authority such that next generation of leaders can gain confidence and skills, make mistakes, learn, improve, and, perhaps most importantly, know what it feels like to have family members, employees and their families rely on their ability to make wise decisions. Real, sometimes difficult experience tests skill sets and suitability but also enables the family member to make an informed decision as to whether the contemplated role for him or her is the right fit.
Step 3 – Plan for Potential Estate Tax
Some family businesses fail due to overwhelming debts or taxes, in particular the 40 percent estate tax. However, with enough lead time it be possible to eliminate estate tax or at least to minimize and defer the payment of such tax. This can make all the difference in allowing a family business to endure and thrive.
Under current law, U.S. persons have a combined gift and estate tax exemption of $12.92 million, but decreasing on January 1, 2026, to $5 million, indexed for inflation, absent a change in law. Some family winery owners are choosing to make large gifts in order to “lock in” the record-high exemption before it shrinks. Transferring business assets today has the added benefit of removing future appreciation from the transferor’s estate.
By transferring a portion of a family business during life, you can ensure that your estate includes less than a 100% interest in those assets at your death, which is advantageous from a valuation perspective, especially if you decrease your position below 50%. When fractional interests in a private company are valued, they are typically eligible for generous discounts for lack of control and lack of marketability.
Lifetime gifts have the additional advantage of being valued on a per beneficiary basis, rather than based on the grantor’s aggregate ownership. Example: (a) You die owning all 1,000 shares of a business with fair market value of $4 million, passing to your four children (taxable estate includes $4 million) versus (b) you give each of your four children 250 shares in the business (each valued at $750,000, or $3 million total, using a 25% discount).
Once you transfer assets you can no longer have the income from those assets, but there are methods to address this if a concern. For example, a person who wishes to maintain cash flow might sell (rather than gift) interests to trusts for their descendants and receive in return a promissory note payable in annual installments. This essentially converts an asset that would have been part of the transferor’s taxable estate into liquid funds for consumption and at a price that is the fair market value at a fixed point in time, excluding post-sale appreciation.
Keep in mind that appreciated assets transferred during life, by gift or sale, do not receive the step-up in basis that is available under current law for assets transferred at death. The step-up would reduce or eliminate capital gains exposure on a subsequent sale of those assets. This is of less consequence, however, if the transferred assets are not intended to be sold and will instead remain in the family.
For active family business that make up a significant portion of a person’s estate, estate tax obligations may be deferred and paid in installments over as many as fourteen years under a family-business minded provision of the Internal Revenue Code, Section 6166. If your family will want to take advantage of this deferral, it is prudent to examine whether or how lifetime transfers, debts, etc. might jeopardize eligibility.
Many families use life insurance to address and pay for estate tax. Large policies of life insurance should be held in irrevocable trusts, with premiums paid following certain technical procedures, to help ensure the insurance proceeds are not subject to estate tax.
Step 4 – Pre-Sale Planning
If the next generation lacks interests or ability to carry the business into the future, sometimes the right choice for a family to continue the legacy of its brand and business is to sell to a third party. In such case, careful planning can maximize value and minimize tax consequences.
In an effort to put the best foot forward, wineries may engage professionals to help them “clean up” their financial statements in the years leading up to a sale. If individual family members or family trusts that are partial owners of the winery have loaned funds to the winery, those loans may be converted to equity and, if necessary to avoid dilution of other owners, superseding loans may be made between owners to move the debt off the winery’s balance sheet.
Any transfers of interests in the family winery to trusts for the next generation should be accomplished well in advance of a sale, to potentially achieve favorable valuations that leverage one’s gift tax exemption.
Those business owners with philanthropic inclination might choose to make gifts of the business interests in kind to charity to reduce the income tax burden of a sale. To achieve the desired tax benefit, such gifts should be considered and executed prior to negotiations to sell and certainly before entering a contract for sale, so as to avoid application of the step transaction doctrine which would treat (and tax) the individual as seller, rather than the tax-exempt charity.
Far from morbid, anticipating personal and business life changes provides peace of mind and helps answer the critical question, “Who will take care of this winery or vineyard once I am no longer able?” From an emotional standpoint, planning helps to ensure that the great wine of today continues to be produced and poured well into the future.
Lauren A. Galbraith is a partner with Farella Braun + Martel LLP in St. Helena, CA. She advises individuals and families on all aspects of estate and tax planning, estate and trust administration, and business succession planning. She can be reached at firstname.lastname@example.org.