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.
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.
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.
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.