Frequently Asked Questions

• What does personal financial planning have to do with business succession planning?

  Aggressive estate and business succession planning should address the lifetime transfer of assets to minimize estate taxation. The transfer of management control and ultimately, the ownership of assets can affect financial security.

  In most cases, the family business is an important security asset to the current ownership generation (parents). Parents are typically reluctant to transfer control or ownership of their business to their children or partners until they have no reservations about their personal financial security. Personal financial planning provides the current owners peace of mind that they can actively participate in the estate continuity and succession planning process without undermining their own security.

• What is the best way to manage estate taxes?

  Managing estate taxes is a four step process:

  1. Recognize the reality that taxes will be assessed the fair market value of your assets being transferred to anyone other than your spouse.
  2. Utilize all compatible avenues to discount the estate tax appraisal of your assets.
  3. Utilize opportunities to defer estate taxes by passing your assets to a spouse. Tax deferral provides continued benefits of cash to heirs. Tax deferral also allows continued action for tax avoidance, such as gifting.
  4. Develop the most effective and compatible way of paying the net estate tax due. The three acknowledged sources for payment of estate tax are liquidated capital, debt and life insurance.
• Is probate really something to be concerned about?

  Probate can be a very significant aspect of estate administration. Depending upon your state of residence, the nature of your estate assets and the harmony of your family, probate can:

  • Increase administration costs;
  • Expose private family affairs to public scrutiny;
  • Increase administrative entanglements that complicate the management of assets, especially an operating business.

• Why do I need written stockholder agreements when I am passing my business to my children?

  Stockholder Agreements are needed in a family business to deal with two main issues:

  Stockholder Security. Unexpected stockholder contingencies such as death, disability, bankruptcy or divorce can create uncertainty about personal security, estate liquidity, business control and stock disposition.

  Precluding Disagreements. Harmony is a vital element for a successful family business. Stockholder Agreements defining the procedures for buying and selling stock should preclude negotiations. Documenting and communicating stock disposition agreements in advance significantly reduces the likelihood of disagreements between family members. A well defined stockholder's agreement will help protect the family from negotiations during emotional circumstances and therein protect the harmony of the family.

• How should I deal with family dissension or acrimony?

  Your first stewardship responsibility is to provide for the appropriate disposition of your business based upon your circumstances. Your subsequent calling is to provide for the succession of your business within your family.

  Teamwork can be taught, but you cannot force unity. Furthermore, you cannot justify transferring your business to children who lack unity of purpose and goals.

  Pursue one of two courses of action - Advise the quarreling children that succession cannot be achieved with disunity. If they do not reconcile their differences, you will select in the interest of unity. Or, advise your children that your responsibility is first to family harmony and security. Therefore, if they do not achieve unity of purpose and goals, you will sell the business.

  Structured communication between siblings may be needed to enhance empathy and understanding. Patience will be needed because relationship problems are rarely resolved overnight.

• One of my children works in the business and the others are employed elsewhere.

  The classic "equal asset distribution" approach to estate planning can be complicated by ownership of a capital intensive business. Inactive children are classically better served by owning more liquid and/or less management intensive assets. The family business complicates the question of asset distribution due to the subjective nature of business valuation and the impact employed children have on value.

  Experience has shown that acceptable solutions can be achieved by developing a reasonable method of business valuation and pursuing an equitable (not necessarily equal) asset distribution that address the circumstances, talents and needs of each child.

  Family Business Stock Transfer agreements are vital to success, wherein contributions of actively employed children are taken into account when valuing a business.

• One of my children has a drug problem. Does this preclude him or her from being a successor?

  No, but admittedly the process of succession is complicated. Submission to help and rehabilitation can produce responsible citizens and effective business managers.

  Children who have experienced the handicap of drugs can respond with amazing self discipline and focus. However, drug addiction at a minimum delays maturity and the learning process. Under less favorable circumstances, a child may never regain the motivation and focus to be an effective role model employee and dependable member of a management team. It is imperative that substance abuse standards are enforced with family members.

  Family members set the standards for performance and attitude. Compromising standards with family members will undermine the enthusiasm and motivation of employees leading to reduction in productivity.