Most family business owners avoid succession planning. Nearly three-quarters of owners who intend to pass on the business to another family member have no written plan indicating who should assume control of the business upon the owner's retirement or death, according to the National Family Business Council.
Understand parents' concerns
Whether or not you are actively involved in managing the family business, you can help your parents plan for the future by first understanding their fears and motivations. For many older business owners, the difficulty in accepting their own mortality causes them to delay succession planning. Owners who started and built up the family firm, in particular, see the enterprise as part of their core identity from which they derive much of their self-esteem. Leaving the business may mean losing their sense of purpose. Further, they may be concerned that their successors will destroy their legacy.
Letting go of the power and perquisites that come with the president's chair is also difficult for some parent-owners. Others refuse to relinquish control because they are envious of their children's emerging talents. One 74-year old father who groomed his son as his successor never mentioned retirement, much to his son's concern. Even though he was family, the son eventually realized that his father saw him as a threat to his hard-earned throne.
Additionally, singling out one child as a successor forces parents to confront long-cherished beliefs that all of their children are equal, and may open up long-dormant sibling rivalries. As the son or daughter of a parent who owns or runs a family business, you may be able to avert conflict by clearly stating your interests and future goals to your parents. For instance, even though both you and your sister are involved in the company, your sister may be the only child truly interested in eventually becoming president. You may be just as happy running the marketing side of the business.
Taxes impede transition
Roadblocks to preparing for a shift in ownership, we have seen, often involve highly complex emotional and psychological issues. These subjects are taboo in many families. But there are other, more tangible topics that you can raise with your parents to get them focused on succession planning. Make them aware, for instance, that highly confiscatory estate taxes can threaten the very existence of the company they worked so hard to build.
One of the reasons so few family businesses survive into the next generation is because the owners fail to do estate planning. When owners die, the remaining family members may be forced to sell the business simply to cover the estate tax bill. Estate taxes are levied on the transfer of an owner's property upon death. Federal estate tax rates start at 39 percent on the first dollar over $1 million, rising to 49 percent on amounts over $2.5 million. The tax law gradually increases the amount at which estate taxes kick in from $1 million to $3.5 million by 2009. Family business owners may, if they meet certain requirements, qualify for a $1.3 million estate tax deduction. This is to be used in conjunction with their applicable exclusion amount. Estate tax liability is of particular concern when the family firm is the major asset of the estate.
Gifts of stock
One way your parents can transfer ownership of the family business and reduce the size of their estate -- and their potential tax liability -- is by giving gifts of stock in the family business to the children. This strategy can substantially reduce transfer taxes, particularly for family firms that are not yet highly appreciated in value but are expected to grow over time.
A business owner can make annual gifts of stock worth up to $11,000 yearly to each of her children, without paying gift taxes. If the gift is made jointly with her spouse, that amount doubles to $22,000. In transferring stock to you and your siblings, your parents may be able to take advantage of special tax rules, which allow owners of closely held companies to give away minority interests in the company at a discounted value. The minority discount permits greater savings on transfer taxes. The annual exclusion is adjusted for inflation every year.
Don't be surprised if your parents give company stock only to those who will manage the business, and other assets to those who are inactive in the firm. In many cases, it is wiser to leave the business to those children who are active in it. For a family business to survive, its leaders should have authority equal to their responsibilities. Suppose you actively manage the company, and your three brothers have other careers. If your parents give 25 percent of the voting shares to each of the four children, your authority could be undermined since your inactive siblings have the power to out-vote you.
In addition to worrying about how their businesses will survive without them, many family business owners also worry about how they will survive without their businesses.
Owners' children often complain that their parents fail to heed their business advice or invest adequately for the future. The children may perceive this reluctance as a lack of confidence, respect or even love. But remember, it's hard enough for the founding generation to release the reins of power of the business they created. It's even harder if they feel that their financial security in their retirement years will depend upon their children's generosity. Don't expect your parents to hand you control of the family business unless their financial needs are well planned for.
One way to address these issues is with a buy-sell agreement. The buy-sell agreement is a legal document that spells out how ownership will change hands in case of an owner's death, disability or retirement. The agreement might provide, for instance, that in the event one of three co-owner siblings retires or dies, the remaining two owners have the right to purchase those shares so as to keep the business within the family. To work as intended, buy-sell agreements must specify the value of the company's stock, and a way to pay for the shares. One funding option is life insurance, which can be purchased by the corporation, or by each owner taking out a policy on the others.
Rojeck is regional chief executive officer for Sagemark Consulting, a financial planning and investment advisory firm. Send comments to email@example.com. All letters are forwarded to the author and may be used as Letters to the Editor.