Family businesses statistically have only a 20% chance of being successfully transferred on to the next family generation. As I have mentioned before in other articles, the death tax owed on the death of the owner of the business is not the major factor for the loss of the business from one generation. To the next. Rather, it is the failure of proper planning that leads to its failure.
For the next two years, a couple will be able to transfer up to $10 million estate tax free to their family. Beginning in 2013 the amount may be reduced to what a couple could do in 2009, which was up to $7 million. What this means is that approximately 98 to 99% of family businesses will not have to worry about death taxes.
What are some of the basic issues that a business owner today must think about in order to properly deal with the major family asset? Some of the basic questions I ask are as follows:
Who will be taking over the family business if owner wants it to continue to the next generation? Is it going to be a family member or some key employee?
Do the owner’s children want to continue the family business or not? If children are involved are they all involved or just one or two? If so, how will the value of the business be shared after your death, if all of your children are to be treated equally?
If the business owner is married, how will the surviving spouse be able to have sufficient cash flow for the balance of his or her life? Where will that cash flow come from? If your business does not pay dividends now, will it after your death to your spouse?
Do you have assets that can be segregated from the business that can produce income without having to run the business if it is sold? For example, do you or the business own the real property where the business is located? If so, you should think about a long-term lease for the survivor, if the new owner does not want to operate the business at the same location. This way the survivor’s lease interest has to be dealt with if the business has to be sold.
Is there a key contract or license agreement that can be placed into a separate limited partnership or limited liability company for asset protection purposes from outside creditors?
Do you want to provide for your children only or for your grandchildren also? If so, do you want your children to have an income with invasion of principal during their lifetime of the family assets in order to assure that there will be no estate tax owed on your children’s death? This is call dynasty or generation skipping planning.
If there is going to be a trustee for the surviving spouse from your portion of the family wealth that you own, who will the trustee be? Will it be the surviving spouse, your child or some third party? Can any of them run the family business or manage the family wealth if the business is sold?
The above questions are just the first of many when trying to develop a plan regarding how to preserve the family business or, if it is to be sold the wealth from its sale. The key point is to take the time to plan so that there is a significant chance your hard work will not be lost.