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When the Family Business Fails to Plan, it Plans to Fail

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When The
famIly BUsIness
faIls To plan, IT
plans To faIl
14 nevada lawyer May 2013
Family, money, power, business,
death, taxes and drama. these could be
the elements of a gripping soap opera – or
a real-life family feud. during the next two
decades, nearly 80 million baby-boomers
will retire and, at the same time, many will
receive inheritances. it has been estimated
that more than $10 trillion will be transferred
from the world war ii generation to the
boomers, which will be the largest
intergenerational transfer of wealth in
history.
1
a large portion of this wealth
is comprised of privately-owned
family businesses.
The numbers encompassing family businesses are
remarkable. Family-owned businesses are the foundation
of the American economy, and the greatest part of
America’s wealth lies within them. Family businesses
comprise 50 percent of U.S. gross domestic product,
generate 60 percent of the country’s employment and
account for 78 percent of all new job creation.
2
According to the Family Business Institute, only 30
percent of family businesses survive beyond the founder’s
generation.
3
The mean age of control in the family’s
core company is 60.2 years.
4
Despite this, 25 percent of
family business owners entering their senior years have
not completed any estate or succession planning.
5
These
numbers illustrate that proper succession planning is key
to ensuring that a business survives – and thrives – for
generations to come.
A business succession plan focuses on three main
factors: ownership, management and tax planning. The
specifcs of how each will be addressed depend on the size
and structure of the company in question.
By KrIsTIn m. Tyler, esQ.
continued on page 16
May 2013 nevada lawyer 15
ownership
A company owned by a sole proprietor is much easier to
plan for than a company with multiple owners, as the transition
is usually governed by one person’s wishes. If the owner
believes someone in the family can carry on the business, then
he or she can make the necessary provisions in the estate plan
to transfer ownership. If the owner doesn’t believe someone
else can carry on the business, provisions can be made for the
business to be sold and for the proceeds to beneft the estate.
If the owners believe other family members can carry on
the business, they must decide how to pass ownership to the
next generation. One option is to give each child an equal share
of the company, regardless of whether or not the children are
working for the company. Another option is to give larger shares
to those children who are, and will continue to be, employed in
the business.
When there are multiple owners, they must discuss the
future of the business in the event of a part-owner’s divorce,
disability, retirement or death. The result of these discussions
is then documented in the form of a buy-sell agreement that
explains how the ownership of the company will be handled in
the event of any of the aforementioned triggering events.
Life insurance, coupled with a buy-sell agreement, can
be an essential component of an integrated succession plan.
The policy is generally structured to pay to the other owner(s)
upon an owner’s death so that the surviving owner(s) can
buy the deceased owner’s share from the estate. Determining
the amount of insurance to obtain will depend on securing a
valuation of the business.
management Transition
The owner must objectively analyze candidates to take
over management of the company in the event he or she can no
longer continue to oversee operations. This has to be strictly
a business decision and the owner may need counsel from
advisors in order to determine who is best positioned to carry on
the business. When evaluating the management transition, it is
time to cast aside the emotional aspect of the family business.
If more than one child is interested in managing the
business, this decision can be complicated. Dividing the
owner’s roles amongst multiple children is an option. The owner
needs to make the diffcult decisions surrounding management
transition in order to lower the risk of sibling fghting once the
owner has passed.
Alternatively, if none of the children are able or willing to
carry on the family business, then the owner must look to key
employees or outsiders to fnd a viable management candidate.
In this case, the best option may be to advise the owner to
consider selling the business upon his or her death.
Once the strategic decisions are made, the owners must put
the plan in writing. The succession plan should outline all viable
candidates to fll management positions. The plan should also
address the triggering events and timeline for transition.
Tax planning
The estate planning exemption was raised to $5.25 million
for 2013 and will be indexed for infation in future years. This
higher exemption level means not as many families will be
impacted by an estate tax. Whether or not a business owner’s
estate will be subject to an estate tax depends on the value of
the company. Many business owners are overly conservative
– or overly aggressive – about the business’ value. The best way
to determine the value is to have a proper business valuation
appraisal performed; however, this can be costly. The cost of
the proper business valuation appraisal must be compared with
the potentially costlier risk of not knowing a company’s value
and the impact that value could have on the owner’s estate tax
liability.
Liquidity goes hand in hand with assessing tax liability.
If the owner’s estate is highly illiquid, the family
could be forced into a fre sale, as the
estate tax is generally
due nine months
after death. The
owner needs to be
cognizant of liquidity
in relation to potential
estate tax liability and plan
accordingly, often with the use of
life insurance.
Integration
Estate and business planning go hand in hand,
as the business may be the largest asset in the family’s
estate. A family business owner must have an estate and
business plan – ideally created by the same advisor – to fully
achieve desired goals and increase the odds of the business
prospering for the next generation.
The estate plan is about the business owner as an individual
and should be designed to protect the owner in the event of
incapacity during life, as well as planning for death. The personal
estate plan will be the vehicle that will transfer the owner’s
ownership of the business. The business succession plan will be
the vehicle coordinating transfers of ownership amongst multiple
members as well as management transition. Tax considerations
affect both plans.
Business owners procrastinate succession planning. They
don’t want to think about the day they will have to give up
control of their business. They cannot fathom someone else
flling their shoes. Failing to plan just paves the way for the
business to fail once the owner is gone.
Estate and business planning is not a one-time event. The
plan must be re-visited and certainly re-evaluated any time a
major life event occurs.
By KrIsTIn m. Tyler, esQ.
16 nevada lawyer May 2013
Issue spotting
The following fact patterns may help in
identifying potential planning issues:
• Successful, young business partners have
been best friends since high school. They have
created estate plans to protect their families.
However, they are naïve about the future of their
business and have yet to create a formal buy-sell
agreement.
• Busy businesswoman – a recent divorcee – has
managed to obtain a sophisticated buy-sell
agreement with her partners so her share of the
business will pass to her estate in the event
of her death. However, she has failed
to execute the proper estate plan
documents to make sure her
estate passes to her young
children in trust, so
her ex-husband will be
unable to access or control
the funds.
• Married business owners with
three adult children have completed an
estate plan that includes special provisions
for their child with gambling and alcohol
problems. However, they remain adamant
that the same addiction-plagued child, who
has helped grow the business for years, will
somehow “shape up” and manage the business
when they die.
• Wealthy business owner has mingled her
personal and business assets for years. She holds
title to her company’s warehouse in her personal
name. Upon her death the real property will
automatically pass to her husband. The surviving
business partners may or may not be excited
about their new landlord.
• Owner is a widower and has been diagnosed
with Alzheimer’s. He has no powers of attorney
or guardian nomination. As a longtime business
owner, he remains hesitant to relinquish any
control. His children are already lining up to
fght over control of dad, as well as control of the
family business.
The stakes are high for the family business. The
success of the family and its business depends on
integrated estate and business planning. It’s never
too early to start planning to protect and preserve the
legacy of the family business for future generations
in case the proverbial bus comes along.
When The famIly BUsIness
faIls To plan, IT plans To faIl
1 NFIB|SmallBusinessAssociation>BusinessResources>BusinessResources
Item.(n.d.).NFIB - National Federation of Independent Business - Small Business
Association.Retrievedfromhttp://www.nfb.com/business-resources/business-
resources-item?cmsid=29078.
2Perman,S.(2006,February13).TakingthePulseofFamilyBusiness.Bloomberg
Businessweek.Retrievedfromhttp://www.businessweek.com/stories/2006-02-13/
taking-the-pulse-of-family-businessbusinessweek-business-news-stock-market-and-
fnancial-advice.
3Gardella,A.(2012,April4).FamilyBusinessesLearntoAdapttoKeepThriving.
The New York Times.Retrievedfromhttp://www.nytimes.com/2012/04/05/business/
smallbusiness/how-they-beat-the-odds-to-keep-family-businesses-healthy.
html?pagewanted=all&_r=0.
4Zellweger,T.M.,Nason,R.S.,&Nordquist,M.(2011,December16).From
LongevityofFirmstoTransgenerationalEntrepreneurshipofFamilies:Introducing
FamilyEntrepreneurialOrientation.Family Business Review.
5Rojeck,R.(2006,March8).SmartSuccession-PlanningStrategies|Entrepreneur.
com.Business News & Strategy For Entrepreneurs | Entrepreneur.com.
RetrievedMarch4,2013,fromhttp://www.entrepreneur.com/article/83806.
KRISTIN M. TYLER isanassociatewithGordonSilver.Her
practiceisfocusedonestateandbusinessplanning,business
formation,charitablegiving,assetprotectionplanning,probate
andguardianship.Shecanbereachedat(702)796-5555or
ktyler@gordonsilver.com.
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TyPESOFBuy-SEllAgREEMEnTS
Cross-PurchaseAgreement Allows the partners or stockholders to
purchase each other’s shares upon
disability, retirement, death or some other
triggering event. This style of agreement
works well for partnerships and smaller
corporations with up to three owners.
Stock-RedemptionAgreement Allows owners to sell their ownership
interest back to the company in the event of
incapacity, retirement or other triggering
event. If an owner dies, their estate is
required to sell the deceased owner’s
interest back to the company. This type of
agreement works well for larger companies
with four or more owners.
Wait-and-SeeAgreement A hybrid type of agreement that allows the
owners to delay the selection of a stock-
redemption plan or a cross-purchase plan
until the occurrence of a triggering event.

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