Entrepreneur are aware of how federal estate taxes can avoid the family business from passing to the next generation.
Entrepreneur are well aware of how federal estate taxes can avoid the family business from passing to the next generation. With an optimum 45 percent tax rate on assets going beyond $2 million, practically half of the company worth is owed to the IRS. With a brand-new president and Congress assembling in January 2009, the federal estate tax environment will end up being a lot more uncertain. (Thankfully, Virginia has rescinded its estate tax.)
Future columns will focus on techniques company owner can employ to reduce or eliminate estate tax, whatever the tax rate and the exemption amount turn out to be. The focus of this column, however, is on the non-tax problems which can torpedo business owner’s finest intentions. As Keith Schiller, an attorney in Northern California has written in an entertaining and useful post about Hollywood motion pictures and their depiction of estate planning issues, “… non-tax issues frequently dwarf all tax considerations. Controversies within households, particularly over the family business, will continue to generate novels, kids’s stories, criminal cases and the news.”
Of course, many households will not suffer the same consequences as the Corleone household upon the “Godfather’s” death, and no organisation succession plan could have saved Vito’s household organisation, but for the majority of entrepreneur proactive planning can maintain the service for the next generation. Without declaring to identify all succession planning problems to consider, the following are returning styles I have seen in my practice. Failure to resolve them can doom the organisation, with or without estate tax problems.
– If the business is to pass to the children, who will manage it? Will a power battle develop because the kids do not have well-defined responsibilities and roles? Will jealousies emerge if one kid is granted more control than another? These issues can be additional exacerbated if son-in-laws and daughter-in-laws are involved in the management. If the children acquire the stock similarly, stalemates can arise that successfully shut down the business operations.
Often times business owner applies such control during his life time that these issues are disregarded or bubble listed below the surface area until his death or retirement. Without him, it is far too late to remedy the ills that might have been treated with his participation. The owner ought to aim during his active involvement in the business to specify the kids’s roles and foster a management structure that can continue when he is no longer present. It would be handy to hold quarterly or semi-annual meetings with the owner and next generation present to instill the management structure. To formalize the relationships, the children ought to be parties to the same documents executed by unrelated parties, such as employment agreement and a shareholder contract. Unfortunately, preparing for the future is often easier said than done when a managing owner lacks the interest to prepare for the future.
– Perhaps a few of the children are not operating in the business. In this case, should the company pass equally to all of the kids or just to the children-employees? The kids in business do not wish to solution to the passive, non-working kids. The non-working kids may not be pleased with genuine or perceived excessive incomes or perquisites enjoyed by the working kids. There can also be disagreements including dividend circulations versus reinvesting in the company, and whether to offer, borrow, combine, and other major decisions. It might be more suitable to leave the service to only the kids working in it. Nevertheless, that might not be possible if a goal is to divide all assets equally among the children.
Obtaining an appraisal to value the company and other properties can signal the family to the looming problem. Next, solutions can be talked about, such as life insurance coverage to assist assign the household resources. Techniques such as acquiring stock and life time gifting can help divide the possessions fairly.
– What if the service is acquired by the kids but they are not capable of running it? Typically times the kids are pursuing their own interests. They have no interest or participation in the service, besides getting their quarterly circulations. Or, the business may have reached a development stage where its continuing prosperity depends on capabilities or experience beyond the kids’s abilities. Just if successful talent is employed and kept can the company continue. In this design, the children are simply investors. Nevertheless, they need to also serve as the business’s directors, with enough interest and oversight to supply instructions and input. If the children can acknowledge their constraints, the company can still be successful with unassociated staff members and outdoors counsel.
– What if there is a step-parent included? The current poster-case for this issue is the relationship– or stopped working relationship– in between NASCAR driver Dale Earnhardt Jr., and his step-mother, Teresa. In 2007, Junior left the company his father had actually established in 1998, Dale Earnhardt Inc. Junior and Teresa, DEI’s owner, might no longer in harmony coexist. Junior stated in May 10, 2007 ESPN article that his relationship with Teresa “ain’t a bed of roses.” Cash was not the problem: at the time of his departure Junior was the greatest paid NASCAR driver. According to the exact same ESPN short article, Junior wanted at least 51 percent ownership so he could control DEI’s fate.
Therein lies the rub: Obviously Dale Elder left the controlling interest in DEI to Teresa. Without knowing how this was done, we can only speculate whether Teresa owns the controlling interest straight, totally free to do whatever she wants with the company during her lifetime and upon her death, or whether it was left in trust for her throughout her life time and then passes to Junior upon her death. In any case, without control, Junior’s paycheck alone did not make him delighted.
It is simple to see this circumstance establish among a kid and a step-parent. Unfortunately, emotions can run even greater amongst blood loved ones when ownership and control of business are divided amongst various household members.
These problems can appear overwhelming to business owner already struggling to handle and run the company. Finding the time, energy and interest to plan for the future is typically postponed till tomorrow. There also is no “one size fits all” solution that is easily discernable. Just as there are a myriad of problems to attend to, there will be a variety of possible services. The option reached might even be to offer the company. If so, this awareness is healthy because the choice is made on the owner’s terms, not a forced decision upon his death or retirement.
One thing is specific: the failure to plan will likely result in the failure of the business’ extension and the diminution of its worth. Whatever may be the appropriate service, company owner can bask in understanding they are not the first ones to face these difficult issues. With appropriate planning and effort, management and control issues can be determined and solved.