Toward the end of 2012, many families with wealth tied to a family business were faced with a choice: 1) avail themselves of the expiring $5.12 million estate and gift tax exemption by gifting interests in their family businesses; or 2) maintain the status quo and risk losing the tax savings opportunity. Many families who had not yet discussed a change in ownership opted to take the risk in exchange for time to prepare a workable plan. Well, this is a case where fortune does indeed favor the bold. The American Taxpayer Act of 2012 permanently set a $5.12 million individual estate-tax exemption (indexed for inflation) and a 40% top rate. Families who opted for the status-quo are now afforded time to “make a plan.”

Transitioning a family-owned business to the next generation involves conversations about sensitive topics like family business succession, wealth transfer, leadership, and management of family assets. Most families find such discussions troubling, if not daunting, because they risk disrupting family harmony.

How often have we heard stories like this: A patriarch builds a successful business. His children don’t work for the family business, but they do benefit from it. The family puts off succession planning because things are humming along and they don’t want to invite discord. Then, tragedy strikes. While coping with their personal anguish, the family must address succession of the business with no idea where to begin. The family flounders to formulate and act upon a strategy for succession, and the business flounders with them. The family’s wealth and future is in peril.

Approximately 70% of family businesses fail, or are sold because they are failing, before transferring to the second generation. These figures are a problem for us all, because family-owned businesses are the backbone of our economy. Reluctance to discuss succession because of the discord it generates is the most often cited reason for these failures.

While family members may find the discussions uncomfortable, the opportunity to preserve family wealth and avoid taxes often helps to soften the blow. Despite legislative talk of “permanence,” the estate tax exemption and rate are in fact constant targets in Washington. For instance, the President’s recently released 2014 budget proposes permanently reinstating the estate tax at the 2009 level of $3.5 million with an increased 45% tax rate, beginning in 2018. Although there is no immediate threat to the estate and gift tax exemptions, families should initiate these difficult discussions now while the time is available.

Prior to opening discussions, the senior generation must first consider whether the next generation will, or wants to, be involved in the management and operation of the family business. One possibility is that only certain family members plan to be active in the future of the business, while others anticipate only an ownership interest. Another possibility is that no family members wish to be involved. These two scenarios require quite different planning.

If the next generation plans to manage and operate the family business, the family must be willing to openly and honestly discuss challenging topics. Each active individual’s role should be based on the individual’s talents and strengths. Compensation should be tied to performance, and the entire family must have an understanding as to how active family members will be compensated. The family must understand that compensation differs from participating in profits as an owner only. These topics would be discussed in the ordinary course of any other business, but they are too often personalized and emotional in the family business setting.

If the next generation does not plan to be involved in the family’s business, or if involvement is not feasible, the family should consider a plan to preserve wealth through future disposition of the business. As with any business, the family business must be profitable to be marketable and there should be a strategy to sustain profitability. Such strategies can be difficult to discuss because they often involve bringing in outside parties with the requisite skills to achieve profitability. Again, although these measures would be undertaken in the ordinary course of any other business, such actions are too often personalized and emotional in the family business context.

The legal aspect of transferring wealth through ownership in the family business, whether with a view toward continued operation or future sale, may be the least complicated part of the transition process. Estate planning techniques, such as the transfer of non-voting interests in the business enterprise, provide avenues for the transfer of the business’s equity to succeeding generations. Depending on a family’s situation, these transfers can be either outright to individual family members or, more commonly, in trust for the next and future generations to preserve wealth by minimizing future estate taxes.

Estate planning, however, must be undertaken with the family’s succession goals in mind. If continued operation of the family’s business is the goal, transferring ownership without planning for the transfer of management and operational duties often creates instability in the business, and passivity and indifference in the younger generation. Honest communication during the gifting process about expectations, involvement, and training can convey a sense of duty, responsibility, trust, and stewardship to the younger generation. With deliberate communication, transferring non-voting ownership in the family’s business during the senior generation’s lifetime, with the expectation that control will pass at death, can provide an excellent opportunity to engage and train the younger generation. It can also provide the younger generation with insight into the business philosophies of senior management, insights that so often go un-communicated when succession occurs suddenly as a result of death or incapacity.

If, instead, the family has decided that a future sale of the business is the goal, this message must be clearly conveyed during the gifting process. Transferring ownership to the younger generation as part of the estate planning process without conversations regarding the family’s decision to sell may be misconstrued as a sign that the senior generation is ready to pass the torch.

Despite the myriad difficult issues family business owners face, families should be encouraged to capitalize on the current exemption amounts and develop a succession plan sooner rather than later. Every family and every family business is different. There is no one succession plan that will fit every situation. But if families can carefully and thoughtfully start talking about these difficult topics, they can significantly decrease their estate tax burden and build long term wealth by creating a successful transition plan.