August 24, 2015

In 1978, I was drafted into a family furniture business. Yes, drafted! I had returned from an out of state job and came to work in a temporary position. I was supposed to be finding a new job, but within months, no job; I now owned a business. This is my story, and I have seen many other similar stories over the last twenty-five years.

Recently I read about a family business in transition; Dad and mom are in their early sixties with a son and daughter in the business. They have two other adult children; a married daughter that has a successful career and an unemployed son that is divorced, with three children. Why should we be concerned about adult children not in the business when discussing business succession? In this case, son and daughter in the business are doing just fine. Daughter will run the business side and son the day to day operations. Both understand their roles and meet weekly to make sure they are on the same page. So far, so good.

Mom and dad own real estate and have a substantial 401k. They think they have enough to fund a comfortable retirement income. As a result, they are planning on gifting the business (value approximately $3m) to their kids, but are in no hurry to do so. Easy transition; no federal gift or estate taxes, as their total net worth is approximately $9m. BUT!!! Let’s look a little closer at the big picture. If something happened to mom and dad tomorrow, there may be a state estate tax of approximately $1m. Where will those funds come from? Liquidate 401k and pay income tax, in addition to the estate tax? Sell a building? Take out a loan? Liquidity is a big issue here.

Also, how will they split the estate after giving the business to the children running the business? What about their son who is unemployed and has three children to support? How will all the adult children feel about the distribution of mom and dad’s assets if they decide upon an unequal distribution? Should an allowance be made financially for the two children not in the family business? Or, should there be no allowance because those two have worked in the business and earned the right to own it. What if one of the children in the business should get a divorce (after the children have assumed ownership)? Will the divorcing non-bloodline spouse now own a piece of the business? Finally, what if one of the children in the business were to become disabled, or die prematurely?

When planning for a business transition among family members, there are many issues to examine. As you can see, this planning also involves risk management (a death or disability), estate planning (gift and estate taxes and estate equalization among the children), and cash flow management for mom and dad. When all these issues are pieced together, there is an excellent chance to achieve the desired result.

I want to thank all of those who participated and helped sponsor the event, and especially our diligent staff that worked hard that day and gave countless hours in the planning and preparation for this annual function. While we closed our offices for a day, I felt good knowing the impact will last much longer. I have heard several success stories from the Y, and even have some from my childhood, as well, that can speak to the Y as a very valuable addition to our community.

As our firm has grown, so has our reach, and we would hope that we can help bring people, organizations and communities together in a meaningful way. If you have ideas on how we can continue to impact the area around us, please let us know and perhaps we can partner together to bring even more positive change.

Brent Soloway, ChFCFinancial PlannerMainspring Wealth Advisors

This example for illustration purpose only and does not represent an actual client. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment decisions. You should discuss any tax or legal matters with the appropriate professional