Presenters:
John W. Ambrecht, Esq.
Ambrecht & Associates
California Trust and Estate Counsellors, LLP
Santa Barbara, CA
Ralph M. Daniel, Ph.D.
Center for Family Business Dynamics
California Family Business Institute, LLC
Santa Barbara, CA
I. INTRODUCTION
A. The Power of Family Businesses.
B. Advantages of the Family Business.
1. They often provide a more humane working environment han other employers
2. There is pride or a sense of identity in the family name on the product or the ranch
3. Provides an opportunity for children for freedom, control of their destiny and autonomy
4. Provides opportunity for personal growth, creativity, and expression
5. Common family interests and interaction to build heritage
6. Opportunity to develop future family leadership
7. Family businesses present evidence of the family's potential power of working together
8. Security to allow other family members to take chances in other careers or ventures
9. Opportunity for philanthropy
10. Excuse to begin developing family goals and plans
11. Great educational opportunities for family to meet and work with many kinds of people
12. Opportunity to stress and demonstrate the values of sacrifice, saving, investment, and risk
13. Most take a long view of management. Instead of managing from quarter to quarter, family businesses tend to manage from decade to decade, or even from generation to generation.
14. Despite long hours and hard work, family business afford family members considerable freedom and flexibility in the use of their time, and considerable independence from outsiders.
15. Family businesses can have a powerful influence for good in the local community
16. They perpetuate the family heritage
17. They permit senior members to withdraw or retire with a sense of continuing accomplishment
18. They usually afford the highest return on investment of family earning power.
C. Why Are There Problems When Passing the Family Business To The Next Generation?
D. Objectives of the Class.
1. Estate Planning involves two important stages: family (emotional) planning and tax and asset disposition planning.
2. Family communication is significantly enhanced by using "structure".
3. Written strategic plans are the recommended technique to implement both family, and tax and asset disposition planning.
E. Definitions.
1. "A "family business" is an enterprise owned or controlled by one or more families who expect that succeeding generations will eventually own it, and perhaps manage it. Family businesses include those that are operated by their founding entrepreneur, as well as those that have already survived one or more generational transfers.
2. Family business can be roughly divided into three categories:
a. Owner-managed business (OM)--the entrepreneur or the one who started the business
b. The sibling partnership (SP)--after the entrepreneur, mom and dad die, the siblings try to work in the family business
c. The cousin syndicate (CS), when the siblings die, the cousins then try to manage the family business
F. Important Themes That Underlie Today's Discussion:
1. There is no one correct answer for solving the problems in family businesses.
2. Family business planning is a continuing process not a one time event.
3. Emotions may be "tender" during the initial planning processes which may, thereby, result in the "three consultant" phenomena.
4. All references to males or females are intended to be interchangeable.
G. The Typical Estate Planning Approach.
1. Tax planning
2. Asset distribution planning
3. Document preparation
H. Underlying Problems for the Estate Planner That Dictate a More Expansive Estate Planning Approach.
1. Many families are burdened with latent unresolved conflicts so intense that they jeopardize successful continuation of the family business in the next generation.
2. Traditional estate planning practices do not ordinarily identify or deal with these conflicts.
and, lastly
3. Proper estate planning for family businesses begins after potentially disabling conflicts have been detected, exposed and addressed.
I. The Interrelationship of: Family Needs, Ownership Issues, and Business Requirements.
1. Role conflict problems--the three circles of stakes
II. THE MONTELEPRE FAMILY
A. The Montelepre Family Genogram.
B. The Family Problems. (The Video)
C. Group Exercise Questions:
1. Do you consider the family a failure although the business eventually succeeded?
2. If so, why, how, and when did the family fail?
III. FAMILY BUSINESS (EMOTIONAL) CONSIDERATIONS
Overview: interrelation of family needs, ownership, and management
a. The concept of the family system
b. Overlapping realms for family business owners
c. Family goals versus business goals
IV. FAMILY NEEDS
A. Family Roles, Rules and Stages of Development.
1. Father-Son relationships
2. Entrepreneurial personality
3. Needs of leaders
4. Stages of the family life cycle
5. Triangulation patterns
B. How Healthy Families Cope with Stress.
1. Strong marriages.
2. Share power among all family members
3. A clear understanding of each persons' roles and responsibilities
4. Open patterns for dealing with family conflict
5. Express feelings
6. A system of beliefs
7. A underlying trust that each person is doing good
8. An optimistic feeling that problems can be solved
9. A tolerance of each family member by being able to see the big picture
10. Meaning and purpose other than self
V. THE INITIAL ESTATE PLANNING QUESTIONS
A. The Pivotal Question.
Before the family can begin preparation of the estate plan, a basic and pivotal decision about whether or not to retain the family business in the family needs to be made. Should the next generation be consulted? A few suggested questions to appropriate family members are as follows:
1. What does the family business mean to you?
2. What is your dream of the future of the family business?
3. Do you want the family business to continue?
4. What role do you see for yourself in the family business?
VI. THE POLEHN FAMILY
A. The Family Genogram.
B. The Family Problems. (The Video)
C. Group Discussion.
1. What was the retirement style of Marvin (the father) before and after the family crisis?
2. As best as you can tell, how did the father, mother and each son and daughter contribute to the crisis?
3. What kind of family changes were made to help alleviate the family crisis?
4. What other business and family "structural" ideas do you think would help the family and the business in preparation of the parents deaths?
VII. The LEGAL TOOLS IN FAMILY BUSINESS PLANNING
A. Ownership Options--Types of Legal Entities.
1. The Proprietorship--difficult to work with for family succession purposes.
2. The Partnership---which can be organized into a general and limited partnership so that control and ownership can be divided. As a part of this category is the new form of organization called the limited liability company which is a corp but taxed and organized like a partnership. Partnerships can also have different classes of partnership interests that pay dividends to children but give any control, and be able freeze values
3. The Corporation---which can have voting and non-voting stock for the separation of control and ownership, can have different types of stock--preferred and common so that dividends could be paid to preferred owners but not to common.
B. Retaining Non-family Employees.
1. Phantom stock plan
This is a plan where the employee is given the right to dollars equivalent to the value of the stock in the business. In this way, the key employee will gain value if the stock value increases without actually owning any stock.
2. Non-Qualified deferred compensation plan
A non-qualified deferred compensation plan is a plan that does not involve any other employees of the company so that the rules that apply to pension plans are not applicable to these plans.
3. Stock option plans
After a designated number of years, the employee could own some stock of the company. One has to be cautious of this plan since the family will lose some of its stock ownership which may not be prudent.
4. Key person insurance plans
Insurance may be purchased by the corporation (and/or shareholders) to fund buy-out plans or to replace the employee if a disability or death occurs.
5. Salary continuation plans
If the employee becomes disabled, the company could continue to pay the employee/s salary with insurance payments.
6. Production Bonus
Salary plans may tie company performance to a bonus to the appropriate employee.
C. Techniques to Transfer Value to the Next Generation.
1. Death tax implications
a. The estate and gift tax rates (to 55%) and exemptions ($10,000 per donee per donor, $600,000)
b. The generation-skipping tax ("GST", a flat 55%) and exemption ($1,000,000, see Ambrecht, J., "Bad Dreams May Be Real," California Tax Lawyer, Spring 1995)
c. Shifting value with discounts
(1) Family limited partnerships
(2) Fractional share discounts
(3) GRITs, GRATs, GRUTs
2. Proposed estate and gift tax legislation
3. Trusts: The flexible tool
a. Revocable living trust (A/B QTIP with GST planning). Who are the trustees?
b. Irrevocable life insurance trust
c. GRATs, GRUTs, and GRITs
d. Charitable trusts: lead and remainder
4. Treating children equitably
a. Does equitable mean the same as equal?
Sibling conflict sources and out comes
b. Planning Options
(1) Consider specific bequests of business interests voting stock or general partnership interests to certain family members working in the business. Non-voting and/or preferred interests to those not working in the business.
(2) Consider using death tax apportionment techniques to help maximize gifts to those unable to pay the death taxes in combination with gifts of other property to those family members not working in the business.
(3) Use life insurance trusts to buy-out and equalize distributions. Consider split-dollar where the business pays for the insurance premiums.
(4) Consider trusts that control the business but give assets to those not in the business if the business is ever sold.
(5) Consider a buy-sell agreement among the heirs so that the heirs receiving the business pay for the purchase with earnings of the business over time.
(6) Consider a split-up of the business into different entities so that each family member will have his or her own business.
(7) Consider giving assets used by the business ( e.g. real property leased to the business) to a trust with non-business family members as the income beneficiaries of the trust and business family members being the trustees.
D. Family Business Phases And Retirement Styles.
1. Ownership stages
2. Retirement styles
VIII. FAMILY-BUSINESS STRUCTURAL CONSIDERATIONS IN SUCCESSION PLANNING TO ENHANCE COMMUNICATION
A. Succession Is A Process.
B. Structural Considerations To Enhance Communication.
The succession conspiracy, or the "why" and "how" communications are enhanced with "structure"
IX. GETTING YOUR FAMILY BUSINESS SUCCESSION PLAN STARTED
A. Develop Your Business and Family Strategic Plans.
Strategic planning provides a systematic way of asking key business questions and is designed to create insights into the company and the environment in which it operates. Such questions should challenge past business practices and open the way for choosing new alternatives.
In a family business there should also be a Family Strategic Plan to spell out the long-term professional goals for family members and clarify the "family structure" suitable for accomplishing those goals.
1. The BDO Seidman suggested checklist of issues to discuss
a. Develop the family plan
b. Develop the business plan
B. Some Ground Rules for Family Business Discussions.
Have the family "buy into" the communication rules.
X. SUMMARY AND CONCLUSIONS
A. What did you learn today?
1. There are two interrelated parts to successful business succession planning: the legal and the emotional aspects.
2. "The primary insight needed by a family is that as a business gets more complicated due to the involvement of more people as the generations mature, governance must grow from one to several" and structure becomes crucial. (Ivan Lansberg)
3. The preparation of written strategic plans for the business and for the family (emotional) issues is the recommended approach to begin implementation of a successful business transition.
B. Suggested Additional Reading:
1. Bork, David, Family Business, Risky Business. Bork Institute for Family Business 1993.
2. Ward, John L., Keeping The Family Business Healthy. Jossey-Bass Publishers 1987.
3. Cohn, Mike, Passing The Torch. Second Edition, McGraw-Hill, Inc. 1992.
4. Danco, Leon, Beyond Survival: A Business Owner's Guide For Success. University Press 1979.
The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained herein.
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