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Business Succession Within The Family
By Ray Chodos and Adam Chodos, Esq., CPA
Many of America's business successes are the result of hardworking-dedicated families who devote extraordinary effort and energy toward their owned and operated company.

Frequently many extended family members also are involved and become an integral part of the business and vice versa. As the founding members achieve greater success and the enterprise thrives there is a tendency to bring family members into management and eventually to have them succeed the elder generation. Often the professional advisors, CPA and attorney fail to motivate the development of a well thought out plan of succession early in the development of the family enterprise. Perhaps everyone is preoccupied with the day-to-day dealings to focus on health, death, and disagreement, any of which can be problematic in achieving a smooth transition. Unfortunately a crisis sometimes needs to occur in order to get all parties together to examine the available options. In other situations of absent planning, the business is simply bequeathed to the surviving spouse as the "natural" thing to do. This seems appropriate since the spouse will likely require continued income and has always been seen as the "other half" of the
owner. This simplistic approach may cause unanticipated problems for all family members involved, even those outside the family business: Team leader. Often the head of the business is seen in this light and able to resolve disputes among the various employees in and outside the family. Also one person generally handles important marketing and directional decisions. When a sudden void is created by death or illness it is not clear as to who should fill the gap. Even worse, who should decide who is best qualified and entitled to serve? Feelings can get hurt, egos damaged, and long term resentment created in the re-shuffle. What becomes of the business as this scuffling is going on? Will the least likely to fight be lost in the dust?

Will those family members uninvolved with the business be left out completely?
The probability of a smooth transition in harmonious fashion is unlikely without planning early, which involves the senior members of the operating family and seasoned advisors.

Areas to consider
Valuation of the business to determine the tax effect of a death, gift, or sale of the business. Once the estimates of tax implications are determined, plans can be drawn to minimize costs.

Entity containers such as limited partnerships can be utilized to reduce valuation for tax purposes without reducing the actual values. Alaska Trusts, Limited Liability Companies (LLC) to name a few.

Creditor claims, which may attach to the family business, have the potential to destroy the value and threaten its very existence. Employee practices (harassment) divorce libel and other tort actions are difficult to predict. Certain entity options make it difficult or impossible to attach the assets of the family business and should be explored. Senior family members should decide whether to sell, gift or a combination in order to satisfy their personal income needs while reducing estate taxation. Funding for the purchase or tax ramification of death can generally be best achieved by the creative use of life insurance.

Operational management
Careful consideration should be given to providing an incentive to promote continued devotion to the needs of the business rather than "wrestling" with siblings and other family members. For the non-business involved heirs, non-voting shares can be bequeathed and tied into a purchase agreement with the operating heirs. This method assures the fair market value to all heirs while retaining voting and operational control by those best suited to contribute to the general well being of the company, and ultimately the financial fate of all the family members. Life insurance or an installment note can be used to facilitate the purchase among the heirs.

A hybrid of an installment
A note designed to end with the death of the seller is useful in eliminating estate tax exposure while assuring income during life.

Smooth transition
It is generally easier to follow the lead of the elder generation when they are involved and instrumental in passing the "reins" to younger members rather than having the family or widow "work it out". While there may still be resentment on the part of those not selected for key positions, the elder generation can see the effects of their actions and amend as needed. Lack of awareness begets little or no planning, which generally results in less than favorable results, including the possible loss of a family business to internal litigation, taxes and credit unavailability. Bringing seasoned planning professionals together with the operating members of the family to produce a summary of likely scenarios under current circumstances is the place where many families begin.

Ray Chodos and Adam Chodos, Esq., CPA are members of the Wealth Preservation Group LLC, a Greenwich, Connecticut based planning organization specializing in wealth preservation, business succession, executive benefits, interacting with the legal and accounting communities. Find more information at www.WealthPreserve.com.
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