There comes a time when mom or dad (or both) recognizes or is reminded that serious thought should be devoted to what happens to the family business when they are no longer there to run it-whether by retirement, disability, death or other reasons. Will the business have value after the parent cedes control, are the children going to play a role, are there key employees to consider, should the business be sold to a third party, should there be a total or partial lifetime transfer of ownership and control, how are children not active in the business going to be treated as fairly as those active in the business, and what tax implications are involved are just a few of the many questions that need to be considered and answered in dealing with this issue. Too often, grappling with answers to these and other questions is simply pushed down the road because the subject is not comfortable to deal with, there is uncertainty how to cope with it, there is a mistaken belief that there is no one out there who could possibly replace mom or dad successfully and take over ownership and management of the business, and/or the tax planning opportunities available appear too complex to deal with.
This failure to plan can lead to some unfortunate consequences down the road that offer the potential for creating negative tax issues, in-fighting among beneficiaries, lack of a qualified person to step in upon the occurrence of a catastrophic event and ultimately even failure of the business to the financial detriment of all. When mom and dad have children, some of whom are active in the business and some of whom are not, the issues can become even more pronounced. Statistics seem to suggest that only about 30% of family businesses pass down to the next generation.
Here are just a few issues that can arise in the family context:
- What type of process for transition of ownership and control is contemplated? Will mom and dad really be able to give up control? There are some people out there that simply don’t have in their gene pools the ability to turn over control to their kids or in some cases anyone else.
- Are some children active in the business and some not? Should the non-active children be excluded from an ownership interest in the business? If they do wind up with an ownership interest, how are non-active children to be precluded from interfering in the running of the business by the active children? How are the short-term and long-term interests of active and inactive children to be reconciled? The inactive kids want a nice annual return. The active kids generally have a longer term view and, of course, want nice salaries and benefits. Do mom and dad have sufficient assets other than the business to ultimately pass along to the inactive children? Many times that is simply not the case.
- With children active in the business, how will differing abilities and work habits between or among them be taken into account? Treating everyone equally, although they will not likely contribute the same benefit to the business, can lead to future problems.
- Do mom and dad favor some children over others-to the detriment of a successful succession plan? There is a changing world with more and more women taking active roles in business. Sometimes, old habits and attitudes are hard to break. What if there is a daughter with greater business acumen than an older son?
- Are there sibling rivalries that need to be addressed? Are these rivalries in the open now or possibly submerged until mom and dad have passed away?
- Is the present business structure the right one for the succession plan or does it need to be adjusted or revised now in contemplation of future events?
So how is a family to deal with these issues of succession? The answer is easy to state, but sometimes difficult to accomplish: develop a succession plan. Generally, a “team approach” is most productive as it is rare that one specific person would have all of the knowledge and experience appropriate to deal with all of the ramifications of family succession planning. Members of this team would likely include at various times during the process the attorney, the accountant, a business succession consultant for complicated situations, the financial planner, the banker, the insurance agent, and a business appraiser. There could be additional advisors in certain circumstances such as a mediator or facilitator if there are numerous family members involved and a business broker in circumstances where a sale to an outside party might be the best alternative. While this array of people may seem complex to some, it is probably most productive for the business owner, spouse and his or her children in the long term to develop a competent team to assist them through this process in order to maximize the return for the family over the long run.
Often tied to succession planning, and many times in addition to succession planning, are issues pertaining to income, gift and estate tax planning and how proper planning can be utilized to maximize returns for the family. Here, income tax consequences in connection with a lifetime transfer can turn on the manner in which a sale or transfer is accomplished, whether by sale of assets, sale of the ownership interest in whole or in part, merger transaction or refinancing transaction. And estate tax consequences, although we are still in a year of uncertainty, can be significantly impacted by lifetime giving, the use of certain types of trusts and the use of family limited liability companies or limited partnerships. General estate planning documents, such as the family revocable trust, should also be adjusted for the uniqueness of the family business. However, mom and dad should be careful that the plan developed for estate and gift tax planning does not unduly complicate a future sale of the business because of the complexities of the estate plan. In light of the recent estate and gift tax changes, lifetime giving will be attractive at least through the end of 2012.
At the end of the day, the family business is a valuable asset that deserves more careful consideration as to what happens to maximize its worth and to successfully pass it downstream, whether to family members, key employees, outsiders or a combination of those people. If any of you will be travelling down this path, please feel free to contact Mike Margrave.
Michael W. Margrave