How to pass down your business--but not to Uncle Sam.
Think of the taxes family businesses might have to pay when the leader dies as voluntary taxes," says David Geller, an attorney and president of the Atlanta family-business consulting firm Geller Financial Advisors.
The good news? A 50 percent-plus tax bite doesn't have to destroy your family's business at estate tax time. A myriad of planning vehicles can provide solutions to 90 percent of the estate tax liability, says Geller.
The bad news is that the later you start thinking about and implementing estate plans, the closer your estate may come to shelling out 50 percent of the business's worth. "The longer you wait to address the issues," says Geller, "the fewer options you have."
While reducing estate taxes is what usually fuels thoughts of estate planning, no family business leader wants to jump into a taxworthy solution without taking into consideration ownership, management and family issues. Steve Swartz, principal with McGladrey & Pullen Family Business Group/Management Development Institute, a Minneapolis firm that consults to family-owned businesses, urges business owners to think about four nonlegal, nonfinancial issues before implementing a plan:
1. Whether you want the business to stay in the family.
2. How to be fair to all children.
3. How much the rest of the family should participate in estate planning and how much they should know about the plan that's ultimately implemented.
4. How the senior generation will be compensated upon retiring.
If your aim is to continue the business into the next generation and beyond, it's essential to deal with the long-term issues related to who should and should not have ownership as well as to what controls and incentives are needed by the next generation.
"In one case, a grandfather saved on taxes by bypassing his five children and leaving the business to his 18 grandchildren," says Swartz. "[But] only one grandchild was in the business, and he had to deal with the problem of 17 unwanted partners. Having to buy out the cousins almost brought the business and the grandchild to ruin.
"The grandfather would have been better served by addressing the continuity issue first, then having experts design a tax-savings plan around it."
Philosophically, families believe that the way you show children you love them equally is to treat them equally. But "equal" rarely means fair. A father might set up a basketball hoop in the driveway as a present to his daughter the athlete, but giving the same gift to his daughter the musician would hardly be fair. Many business advisors say the same applies to company stock.
"The father of one family business decided to leave the stock in the company to his son, who was in the business, and an equivalent amount of [other] assets to his daughter," Swartz recounts. "She was hurt, thinking her father didn't care enough to give her stock in the company or to consider that her brother might be getting more because the value of the business was bound to increase. Her father explained that this was not a question of who was the better loved. But if the brother helped to increase the value of the business, he would be entitled to the profit--just as the daughter would be entitled to the profit of mutual funds she inherited if they increased in value when she sold them."
"Parents shouldn't abdicate estate planning decisions to children," says Geller. "But as long as children are old enough to have some involvement, it is important to find out what they want." Do they feel ownership in the company is part of their birthright? Do they care about control? Do they want to be in company management one day, or are they uninterested in the business?
"Too often parents talk only to each other about what's fair for the children and don't hear what [the children] have to say," says Swartz.
Once the plan has been developed, share it with those who will be affected by it. Says Swartz, "An estate plan is not complete unless the next generation knows about it."
Whether the older generation will need support from the business during retirement affects what tax-saving strategies can be used. If continuous financial support must be built into the estate plan, there's potential discomfort on the seniors' part that they will be dependent on their children as well as considerable pressure on the next generation to run an operation with enough cash flow to support the parents' retirement. If estate planning starts early, however, the senior generation has time to develop assets outside the business, and the discomfort can be avoided.
Estate planning is not high on any entrepreneur's to-do list. "It's important, but not urgent," says Geller. "I tell people that the most successful business owners I know spend a lot of time on important but not urgent matters. The least successful ones spend a great deal of time on urgent matters and less on important ones."
Keep in mind that nothing is set in stone; you can and should change your estate plan every time major life or business changes occur. If you've made plenty of sacrifices to build a substantial business to hand over to your children, the sooner you start estate planning to preserve that business, the better.
Patricia Schiff Estess publishes the newsletter Working Families and is the author of two new books, Managing Alternative Work Arrangements (Crisp Publications) and Money Advice for Your Successful Remarriage (Betterway Press).
Geller Financial Advisors, 2957 Clairmont Rd., #320, Atlanta, GA 30329-1647, (404) 315-7200;
McGladrey & Pullen Family Business Group/Management Development Institute, 801 Nicollet Mall, #1300, Minneapolis, MN 55402, (612) 376-9376.