The 1980s and 1990s saw a new trend take hold in the brewing world: the rise of craft microbreweries. A long list of now well-established names in beermaking began popping up all around the United States around this time, including Boston Beer Co., Abita Brewing Co. and New Belgium Brewing Co.
Over the last several years, however, many of the craft brewers and distributors who built these profitable businesses have cashed out and sold their businesses to global corporations and private equity firms. Meanwhile, some owners hope to keep their business in the family — carrying on their legacy and passing down the equity they’ve built — though not every descendant has the desire to follow in their parent’s footsteps with an active role in the company. As with any business owner contemplating retirement or an exit event, questions surrounding succession planning loom large.
One way or another, in the coming years, additional brewers and distributors will need to protect the wealth created by their liquidity events. Brewers and distributors who have not exited the market will need a succession plan for their businesses to protect the value from family disharmony, estate tax, and creditor and marital claims.
The importance of a business succession plan
Creating a business succession plan is a process, not an event. The conversations that will eventually lead to a formal transition to a family member or another party should start taking place years in advance — helping to minimize negative repercussions to the owner’s departure. The goal is to create a seamless, smooth process that takes into account the owner’s desire to protect what they’ve built and to continue having a voice in the future decisions of their company, and to eventually pass voting controls to qualified family members. It is important to define a clear vision for succession, and then to develop a business and management continuity plan to align family members, key management personnel and other stakeholders with this vision.
Let’s dig into the two essential elements that brewery succession plans should have.
Part one: Protecting the equity
Many beer distributorships are long-running family businesses that get passed down through multiple generations. But the federal estate tax, which applies to large estates at a rate of 40%, can have a crippling effect on businesses given to heirs without any kind of protections put in place.
However, it is possible to pass the equity of a business from one generation to the next while also protecting it from creditors, lawsuits and marital claims from the family or future descendants. One solution is to implement a combination of two strategies: a dynasty trust and a Domestic Asset Protection Trust (DAPT).
Placing a business’s equity inside a dynasty trust allows family wealth to grow for multiple generations free of estate tax. By taking the additional step of qualifying that dynasty trust in one of the 17 states that allow DAPTs, there are a number of additional benefits:
- Under state law, the beneficiaries of the trust are generally protected from future creditor and marital claims.
- Although the assets inside the DAPT require an independent trustee to approve any distributions back to the beneficiaries, the grantor (the person who creates the trust) and his or her spouse retain a significant degree of access to that wealth should it be needed to fund lifestyle expenses.
- The grantor and his or her family have the ability to control the trust’s investment activity, which insulates the independent trustee from liability if, for instance, the trust suffers losses.
For owners who are opting to sell their businesses, placing the wealth created by the exit event into a DAPT dynasty trust will not only allow owners to shelter the wealth from creditor claims, but also allows owners to take advantage of today’s historically favorable tax rules on generational wealth transfer, including discount valuations for gift tax purposes.
Part two: Protecting for the succession of voting control
As brewery owners begin to retire, many want to remain in voting control — ultimately still having a say in how their business functions until they’re ready to fully turn over the reins to a successor. However, any shares of a company put inside a DAPT dynasty automatically lose their voting rights, since maintaining them would give too much power to the grantor.
But an owner can still maintain control over their company by putting the lion’s share of their equity in the DAPT dynasty and leaving out a small share — as little as 1 percent. As long as a small percentage of equity remains in the hands of the owner and outside the DAPT dynasty trust, the owner will continue to have voting control of the business.
As a business succession plan takes shape, business owners may opt to hold onto their voting control until their heirs are qualified to run the business on their own. It is also important to tie key management personnel into the business succession plan.
A looming change
Why should brewery owners and distributors act now to start the succession planning process? The historically high exemption from federal estate tax.
Today, the personal federal estate tax exemption amount is $12.06 million. This exemption will increase to $12.92 million in 2023. This means that an individual may transfer up to $12.92 million (and as much as $17.4 million using valuation discounts) during their lifetime without paying tax, and any amount over $12.92 million is subject to federal estate tax, likely at 40%. Under current law, this historically high exemption will continue to adjust for inflation through 2025, but will fall to around $6 million in 2026, if not sooner.
Transferring wealth into an DAPT dynasty trust today and completing the gift will lock in an individual’s $12.92 million exemption amount and allow those assets to grow outside of the taxable estate.
The time is now
Brewery owners and distributors who are thinking about retirement — or who are younger entrepreneurs just starting to grow their businesses — should be thinking about how they can shelter what they’ve earned from future estate taxes and creditor and marital claims, while maintaining voting control. We’re in a historically favorable environment to transfer wealth in business, and a trust strategy gives owners lasting protection during extremely volatile and uncertain political times.
For those who are preparing to turn over their brewing business to their heirs, taking advantage of these planning strategies helps set those loved ones up for success for decades to come as they continue the family legacy.
Michael Beals is a member and business succession practice group chair at Dickinson Wright in Troy specializing in corporate and trust law. He counsels privately owned enterprises and high-net-worth entrepreneurs, with a particular focus on moving business and wealth from one generation to the next.