Giving Stock to the Next Generation
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The younger generation is eager to get stock in the family business, but the older generation is reluctant to give it up. How does this impasse get resolved?
Estate-planning experts suggest gifting stock from one generation to another in family businesses be done often and early. "It makes sense to give stock away to your successors when its value is low-assuming you have a growing company and expect the stock to increase in value," says Ross Nager, executive director of the Arthur Andersen Center for Family Business in Houston and co-author of The Family Business Answer Book(Prentice Hall). "That's because gift tax consequences are based on the fair market value of the stock at the time it's given."
But Nager would be the first to advise against making decisions solely based on what makes tax sense. In family businesses where multiple considerations come into play, estate tax is just one factor.
First, there's the issue of timing. Starting the gifting process early when it makes the most tax sense often doesn't sit well with the 50-year-old parent who's in the prime of life and "competent, knowledgeable and with many productive years ahead to lead the company," says Quentin Fleming, a management consultant in Marina del Rey, California, and author of Keep the Family Baggage Out of the Family Business(Fireside).
For the head of the company, it often feels like he or she is giving control to children who, however loved, may not be qualified to handle it. "But if you wait until your mid-60s and 70s, options narrow and there are fewer arrows in your estate-planning quiver," says Orange, California, tax and estate attorney Wayne Allen.
In addition to taxes and timing, there are other pivotal issues-some emotional, some financial, some practical. Do you want to retain financial control of the business? Are you uncomfortable with the level of your children's commitment, maturity and leadership abilities? Do you give stock equally to all your children regardless of whether the kids are in the business? Do you have ongoing financial resources to support yourself in retirement? If the answer to any of these concerns gives you cause for worry, you might very well be reluctant to gift stock. Let's take a look at the different areas:
Financial control. It's generally assumed that gifting stock means you're giving up some financial control. However, that wasn't the case for Jack Krenzen, founder of Krenzen Indoor Auto Mallin Duluth, Minnesota, when he began a gifting program to his sons in 1977. After all, the boys were in their 20s and he was in his 50s at the time. Krenzen developed two classes of stock-class B, non-voting stock, was gifted to the boys, while he retained the class A, or voting, stock. Today, though Krenzen is essentially retired and two of his sons, Scott and Howie, run the business and make the operating decisions, he still retains a majority of the class A stock and just 25 percent of the class B.
Stewardship training. The intangible family business gifts are values, skills and insights. "You may have to help your children develop these before you transfer the tangible gift of stock," says Nager, who believes in readying the next generation for its ownership role. But don't confuse shared values and goals with doing things as dad or mom did them. Every generation will manage differently and put its own stamp on the company-not only is that its right, but also its responsibility.
Equity among siblings. Textbooks say to give stock only to those children who are active in the business. But that doesn't always jibe with reality. First, if you start gifting in your 50s, you probably won't know which of the children will make the family business a career or who will be your ultimate successor. Second, most parents want to leave their wealth equally to their children. But once they begin planning for their estates, they often find that the greatest percentage of their assets are tied up in the business. So they're in a bind: Give all the children equal amounts of stock, or leave a greater percentage of your wealth to those in the business.
Getting around the dilemma means bringing the family together for discussion. From a practical standpoint, Nager suggests people begin building up nonbusiness wealth, such as real estate or stocks, as early as possible so that children who aren't active in the company will inherit something other than shares in the family business. And though people would be wise to begin gift-giving early, Nager also advocates maintaining the flexibility to move stock from one child to another at the appropriate times.
Krenzen has done just that. His oldest son, Steve, was given stock in the Duluth dealership years ago when all the boys were young adults. But Steve left the business and established his own dealership in California. "We set up a mechanism for Scott and Howie to buy Steve's stock over a period of seven years," says Krenzen, "and it has worked out very well for everyone."
Retirement resources. When the older generation thinks of retirement, it worries about whether there will be ongoing resources. Because stock in the family business is often the older generation's primary asset and means of financial security, there's a hesitancy to give it away too early-especially because it's hard to know how much you'll need in retirement, given life's uncertainties. "But if you have built sufficient wealth outside the business, you'll feel more comfortable, financially, transferring some stock," says Nager. And if the value of the business or estate is modest enough that sophisticated estate-planning techniques aren't applicable, or if the older generation's retirement needs are greater than they planned for, then Allen suggests the older generation may have to sell some stock to their children rather than gift it.
Upcoming generations have to realize that the older generation is more likely to relinquish stock if its concerns have been addressed-one more reason why open communication between the generations is so important. Once everyone understands the concerns, then estate-planning techniques and strategies can be developed. Seek professional guidance here. "I ask people to share their concerns with me and tell me where they want to go," says estate attorney Allen. Then he asks them to allow him to paint a picture that addresses their trepidation and relieves their anxieties. Very often that picture includes gifting stock.
Patricia Schiff Estess writes family business histories and is the author of two books: Managing Alternative Work Arrangements(Crisp Publishing) and Money Advice for Your Successful Remarriage(Betterway Press).