Estate Planning

Women & wealth: Be prepared!

In the past few months, the subject of women and wealth has come up frequently in my conversations with friends and colleagues. This is a timely topic indeed. According to Diane Doolin of the Doolin Group at Morgan Stanley, “The greatest wealth transfer in history is under way, and research tells us that women will control 70% of the nation’s wealth by 2030.” In keeping with the Girl Scout motto, “Be prepared,” women must educate themselves about the challenges they will face.

Doolin presented a session on financial readiness for women at our recent Transitions West conference, held in San Diego. According to Doolin, many women have not met with their family’s trusted financial adviser, nor do they have access to key records, passwords and documents. This can be a critical issue when facing the sudden death of a spouse or partner. She poses some questions: Are you aware of all your financial assets? Do you have life insurance, a will and a tax plan? Have you informed your children about your estate plans?

Having a family business further complicates the situation. What is the family’s policy toward married-ins? Where are the key documents? Who owns the stock? What trusts have been set up?

Women must ensure their children and grandchildren are prepared to be good stewards of their wealth. Regular family meetings with financial advisers are a good place to start. Often, until a death or divorce occurs, most children have not met with their family’s adviser and have not been part of the planning process. Early communication and financial education are necessary to have a successful wealth transfer. Otherwise, Doolin warns, the family faces a universally lamented fate: “shirtsleeves to shirtsleeves in three generations.” (A similar saying in Chinese translates to “rice bowl to rice bowl.” In Italy, it’s “stables to the stars to the stables.” In Brazil, it’s “rich father, noble son, poor grandson.”)

“It is critical for women to participate fully in decisions about planning and their financial futures,” says Adrienne Penta, senior vice president of private banking at Brown Brothers Harriman.

“Families make better decisions when all stakeholders are at the table,” Penta says. “Unfortunately, women sometimes opt out of these conversations because many feel as if they are not heard or they are misunderstood. In fact, 67% of women feel as if their adviser doesn’t understand their values or objectives.” This drives the need to create an inclusive and dynamic environment for conversations about wealth that, in the end, will provide a foundation for preserving family wealth over generations, she explains.

Women who work in their family business or are active in family governance tend to be better prepared for their future roles as inheritors. The rest must begin the process of educating themselves. If you cannot answer all of the aforementioned questions, start asking for help now.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

Who will inherit the family business? A strategy for succession planning


A poorly planned succession has the potential to derail a closely held family business. The lack of a well-drafted plan can cause financial hardship on both the business and the family. Letting the estate plan dictate how a business is passed on may cause issues, and there are numerous stories of prominent business empires that have been adversely affected by the lack of a well-designed succession plan.

There are several strategies that small business owners can take to ensure a smooth transition from one generation to the next. Careful planning is needed. Families should be aware of the important role that life insurance can play in smoothing the transition from one generation to the next.

Estate planning is not succession planning

The first thing to keep in mind is that estate planning and succession planning are not the same—they have very different goals. Generally the goal of an estate plan is to primarily provide for the surviving spouse and subsequently provide for children equally. The goal of a business succession plan, however, is to ensure the business passes to the heirs who are active in the business. One of the big challenges involves addressing the needs of children who are active in the business as well as those who are not. Should all the children be treated equally, or should they be treated equitably? Too often, the succession defaults to the owner's estate plan, which usually calls for the estate (including the business) to be divided equally among all children.

As an example of how complicated this can be, consider a business family with two sons, one who works in the family company and one who doesn't. The active son, John, has really built up the business, spending considerable time and effort to grow it. The dad, Mike, stepped aside many years ago, although Mike still owns 60% of the business because he is not yet ready to relinquish control. Of the balance, 30% is owned by John and 10% by his brother, Mark.

John feels that he should get the business, and he's been identified as the heir apparent. In fact, the estate plan says that the business passes to John and all other assets are divided 50:50. Mike's wife, Ann, is upset that Mark's inheritance isn't the same as his brother's. Ann wants everything equal across the board. Succession plans for family businesses can become fraught with all the emotional interplay that occurs in families. Family members must understand that there is a difference between "equal" and "equitable." Equal distribution does not take into account the contributions of the children who are active in the business and contribute to its success. An equitable distribution considers these factors.

There are several strategies that closely held family business owners can use to ensure a smooth transition.

1. Address the needs of both active and inactive children. Those who spend their careers contributing to the company's growth and success should be rewarded for their efforts.

2. Recognize the difference between equal and equitable distribution. Should all the children be treated equally, or should they be treated equitably? Business owners should consider the needs of all family members, including their own needs, when developing a distribution strategy. Not every family member has the same needs or wants. It may be best to leave the family business to the active children and other assets, such as investments and life insurance, to the inactive children.

3. Hold a family meeting. Family business succession planning can get bogged down by emotional complexities. The family should consider holding a family meeting, moderated by trusted professional advisers. A meeting enables family members to talk through the issues and the roles and responsibilities of all family members, both active and inactive.

4. Obtain a valuation of the business. The key to a viable succession plan is a formal valuation of the business. Basing any transfer, during lifetime or upon death, on a proper valuation helps to limit the chances that the IRS will contest the valuation, which would result in additional estate or gift taxes.

5. Commit to a succession plan. Without a well-designed business succession plan, inheritance of the business defaults to the owner's estate plan, which often distributes the estate (including the business) equally among all children. Owners must give careful consideration to how the business should transition to the next generation. When a written plan is created, it should be communicated to all family members.

Gifting stock

Once a succession plan is in place, it is important to recognize the efforts of the children who are active in the family business. For example, John, in the situation described earlier, should be rewarded for his efforts in growing the business. Mike should consider gifting additional stock to John, both to reward him and to shift the future appreciation and growth of the family business to John's estate as opposed to Mike's.

If Mike is thinking about gifting an additional 5% stake in the business to John, he should consider using valuation discounts to leverage this gift. For decades, senior-generation family members like Mike have made gifts or sales of minority and non-controlling interests in their family businesses to junior-generation family members. Through proper planning, these business owners have used the lack of marketability and lack of control valuation discounts—generally 20% to 30%—to reduce transfer taxes and increase the amount of wealth transferred over several generations. If he wants to implement this strategy, Mike should act now, as the availability of these discounts in the future is questionable.

The role of life insurance in succession planning

Owners of closely held family businesses should understand the multiple roles that life insurance can play. Since the triggering event in most business successions is death, life insurance can obviously serve as the main funding vehicle for a well-designed succession plan. It can also provide liquidity when it is needed most—not only to transition the business to the next generation, but also as a source of funding to pay federal and/or state estate taxes. Life insurance might be used to fund a buy-sell arrangement for the active children, or it can serve as a wealth-replacement vehicle for inactive children who will not receive an interest in the business. In the previous example, John could own a life insurance policy on his brother Mark's life to help pay Mark's family for the value of the business when he passes away. If John owns a permanent life insurance policy, he might have cash value that he can access for an installment purchase of the business in case Mark wants to be bought out sooner.

Another objective that life insurance can fulfill is equalization between children. For example, Mike, the dad, could purchase an insurance policy on his life (or on him and his spouse) and name Mark (or a trust for his benefit) as the sole beneficiary. John would inherit the business, and Mark would inherit an equivalent amount in life insurance to make the brothers' inheritances equal—just as Ann wants.

Succession planning is a big topic, and this brief overview has barely scratched the surface on many issues, but this should help explain the importance of putting a plan in place. Formulating a succession plan is critical to the continued success of a closely held business over several generations. If the legacy of the business is important to your family, take the time to develop a strategic succession plan.

Meg Muldoon is an assistant vice president of advanced sales with The Penn Mutual Life Insurance Company ( She also has related experience as an attorney in the financial services industry.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Two money-management lessons for heirs: Quantify and qualify


In estate planning and wealth transfer, various financial tools—including trusts and partnerships—are available to help the next generation "test the waters" of sound money management.

At some point, however, the heirs take over and the risk of errors increases. Responsible heirs follow two simple but critical rules of fiscal stewardship: Quantify what you really need to live on, and qualify what a rewarding or comfortable lifestyle means to you.

This is not always as simple as it sounds. Heirs' abilities to understand the responsibilities and pitfalls of wealth vary, depending on their knowledge, interest and preparation. As any parent or key manager will admit confidentially, some family members are ready and others have a long way to go.

A 2014 survey by Merrill Lynch found that 70% of respondents with $5 million or more in investable assets wanted their money to last beyond their lifetime, but only 16% of those respondents correctly pegged the percentage they could actually live on for sustainable wealth. (Most overestimated.) Two common mistakes included overgiving without accountability and confusing wealth discussions with simply talking about dollar amounts.

Discussing dollars and cents is important. However, these conversations require context. What dollar figure does each heir believe he or she needs in order to live a quality and comfortable life? What is considered "fair" treatment of family members who work in the family business and those who don't?

Below we present a scenario involving a family who needed to quantify and qualify their approach to individual inheritance. (The names and situation are fictitious and are used for illustration only.) Note that the situations they faced had the potential to reduce their wealth and raised questions about fair distribution, wealth management competency and philanthropy.

The Dahlagher family

The Dahlagher family made their money in farming and built an agricultural products enterprise that includes a feed distribution company. The business is in the third generation of family ownership. Howard is the retired family patriarch. His brother Arthur (president) and daughter Jordan (vice president) are running the company. Most family members do not work full-time in the business, while some have transitioned in and out.

Let's examine how the individual goals of three next-generation family members affect the family business and the family's wealth.

Carla: The aspiring entrepreneur. Carla, a recent college graduate, is Arthur's youngest daughter. She wants to run her own business, financed initially by family money. She has worked in the family business off and on but doesn't have an interest in it as a potential career.

Carla won't have access to her trust until she is 35, but she would like to open a restaurant and has requested startup funds from Arthur. Carla hasn't had to worry about money and is used to asking for it when she needs it. She has a business plan and has set her sights on leasing a building in a trendy part of the city. She has also discussed partnering with a chef.

Because Carla is unproven as an entrepreneur, it is not likely that family members want to put their personal money or the family business at risk. One option is to discuss the possibility of a loan from Carla's trust. If the business thrives, she can pay the money back and begin to earn an income from the business until her trust matures. If the business fails, she will effectively receive a smaller inheritance with low risk to the family wealth.

In the meantime, Carla will recognize that she has a finite amount of money that she could lose if the business fails. She will also realize that she is in charge of sustaining and building her own personal wealth for her lifetime. As a young person, she may not have previously considered the long-term impact of risking her wealth. This request presents a perfect opportunity for Arthur to talk with her about her life goals and the variety of ways to build wealth with less risk. What does she believe is "enough" to live on, now and later? Arthur can let her know that she will always get family support, but financial support is not guaranteed forever.

Jordan: The vice president. Jordan, married with one child, is Howard's daughter. She has worked in the family business since graduating from college. She also assists with decisions regarding the management of her father's and uncle's personal finances and investments through a family office. She has a strong interest in preserving the family wealth for the next generation, but she also wants to leave a legacy.

Jordan's idea of a fulfilling life involves traveling and helping needy communities around the world. She anticipates working part-time and hiring a non-family CEO when Arthur retires. She also wants to set up a private foundation, but she hasn't convinced the family to take action.

Many members of wealthy families want to support worthy causes. It is OK for individual family members' philanthropic goals to differ, as long as there is some agreement on which causes the family business will support. Establishing an annual budget and clarifying giving categories can keep family members inside and outside the business on the same page. This will also help the business manage requests from community or charitable organizations.

There are pros and cons to starting a private foundation that should be considered. As an alternative, donor-advised funds for specific causes or charities require less administration while still offering tax benefits and the rewards that philanthropic activity brings.

Jordan's plan to hire a CEO to enable her to pursue her personal passions also needs careful consideration. Currently, she receives a salary and benefits from the business. If she cuts back to a part-time position, her pay will be reduced—and so will her influence on business decisions.

It is in Jordan's and the family's best interests to have discussions about succession before Arthur nears retirement. She may be able to maintain her full-time position while also taking breaks to pursue her volunteer activities—and gradually transition into retirement with a comfortable nest egg for herself and her family.

Jon: The doctor. Jon is Howard's son and Jordan's brother. He has a specialty medical practice in an affluent area. He has some personal ongoing expenses from a recent ID theft, a divorce settlement and shared custody of his three children. Although Jon earns an income outside the family business, he believes he should have a share of the family wealth. Currently, he is a shareholder in the business and receives an annual profit-sharing dividend. He thinks the amount of his dividend will increase.

As a busy doctor, Jon experiences a lot of stress. He has a vacation home but wants to purchase a second vacation home in the Caribbean that he can escape to and rent out when he's not there.

Although Jon worked in the family business in the past, he isn't contributing to its success going forward. The family must discuss the difference between compensation and bonuses (for family members who work in the business) and dividends (for all owners, whether they work in the business or not). Determining a value for the business today may help calculate each family member's fair share. Those figures can be brought to the board for a vote.

Whether an individual family member should benefit from the company's future growth may be decided on a case-by-case basis. By the same token, the way ownership is divided determines the risk each family member would face should the business profits shrink.

Jon has a right to use his money however he chooses, but he must understand that his dividend from the business is based on the company's continued profitability and is not guaranteed. Can he afford the lifestyle he wants (and be able to pay his debts) on just his salary? The second vacation home may have to wait in light of those considerations until some of his debt is paid off. He also has his retirement and children's futures to think about. He needs to get his estate planning in order, as well; after all, he might get married again.

Start your planning now

Each person has his or her own understanding of what a comfortable lifestyle entails. That's why the family and their advisers must review the numbers in terms of liquid and illiquid assets, tax impact, risk management and charitable giving. Each individual heir's life expectancy and goals should be considered. Your advisers can help you devise the best solutions for your family members, your business and your family legacy.

The senior generation shouldn't just assume that their children will make sound spending decisions. A family wealth education program can teach heirs how to preserve family wealth into the next generation and beyond. It is best to have a series of discussions over time (months or years leading up to the generational transfer of wealth) so that heirs are informed as well as comfortable with the plan.

Sometimes major life or business transitions can prompt these discussions. With change can come strong emotions. Try to look for areas of shared values and goals within the big picture of preserving family wealth.

Homero Carrillo Jr., CPA, manages the family office and tax practice at Weinstein Spira (, where his clients are entrepreneurs and high-net-worth individuals. Amy Sbrusch, CPA, serves the real estate and business interests of her clients at Weinstein Spira.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Estate constraints often do not work as planned

In a letter to James Madison dated September 6, 1789, Thomas Jefferson wrote, "[T]he earth belongs in usufruct to the living . . . the dead have neither powers nor rights over it." But contrary to Jefferson's suggestion, in multigenerational family businesses the earth often belongs to the dead.

While we are all influenced by past generations, some family businesses (and their stakeholders) are not only influenced but also controlled by them. Devices such as elaborate estate constraints, incentive trusts and restrictive gifts determine which actions the living must take to inherit a full share in a family business, how the living will manage the business and the terms under which they may sell it.

When family business owners are deciding how to dispose of their interests, they are typically concerned not only with the preservation of the business, but also with the development and self-sufficiency of their heirs and the strengthening of the family that owns the business. The way these dispositions are made affects the long-term sustainability of the business, the functioning of the family as a group and the functioning of individual family members. Despite the attention usually put into the structure of transfers, some of the most serious problems family businesses experience result from intergenerational transfers that do not accurately assess such impacts.

Decision making after death

Consider the following hypothetical: The patriarch of a family established a chain of local hardware stores that has thrived despite vast changes in the competitive landscape, especially intense pressure from larger, well-capitalized competitors such as Home Depot and Lowe's. The business owner also shrewdly purchased the real estate in the stores' locations. In his estate plan, the father transfers ownership of the stores (the family business) to his two children in equal shares. One child works in the family business but the other does not.

The terms of the transfer prohibit the alienation of the shares during the children's lifetime for less than a price predetermined by the parent. They require that if a transfer is to be made, all of the family business assets must be disposed (e.g., the non-real estate assets may not be sold without the real estate, and vice versa). The terms of the transfer also require the creation of a board of directors consisting of three people—the two children and the father's financial adviser.

Despite the father's best intentions to plan for the future, this restrictive structure may generate a set of problems once he dies. A restrictive transfer implies that the transferor views his or her heirs as immature and doubts their capacity for judgment and for cooperation in the present and the future. Thus, it may limit the heirs' personal development. In addition, it puts extra pressure on the relationship between the heirs as they engage in joint decision making about the business. Even after death, the transferor remains the decision maker. Yet, for a transfer to have long-term success, the next generation must make a transition from "the children of the family" to a partnership of mature adults who are able to make their own decisions.

Overfunctioning and underfunctioning

Family Systems Theory, introduced by Dr. Murray Bowen in the 1960s, describes "over/underfunctioning pattern," a relationship pattern that is helpful in understanding the underlying family dynamics of a restrictive transfer and its implications for the future. One family member (often a parent)—the overfunctioner—takes more responsibility than appropriate for a given situation, while another (often a spouse or a child)—the underfunctioner—takes less responsibility than appropriate. Both postures have costs, yet the pattern tends to perpetuate over time. Overfunctioners often feel overburdened, tired and resentful of the excessive load but are convinced that things will fall apart if they fail to act. Underfunctioners deny themselves the chance of living life to the fullest of their capacities by staying in a more dependent and immature position. Underfunctioners are convinced that they can't do anything different and resent the miserable position they are in. Analysis, thinking and effort can unlock an over/underfunctioning pattern. Regrettably, a restrictive type of transfer can contribute to the persistence of this pattern for generations to come.

In addition to locking such a pattern in place, restrictive transfers of family business interests can carry other serious complications. No transfer can fully and accurately foresee the future circumstances that family members and the business will face. In the hypothetical example above, the parent limited the rights of his children to exit the family business by establishing a minimum sale price. That price may not be realistic by the time the siblings inherit the business. Further, if one of the children experiences significant financial need—because of an illness or for another reason—and a sale becomes necessary, the restriction is likely to cause serious consequences for that child as well as conflict between the siblings, who in this case have very different roles in the business.

Beyond a foreseeable circumstance such as financial need, other situations may arise in which the only rational option is to sell the family business. It may turn out, for example, that the land proves to be far more valuable than the business itself. The children or family members need to have the freedom to sell in that situation, or else one goal of the parent (the financial health of the heirs) is jeopardized. The restriction itself, contrary to the father's desire to promote his family's financial security in the present and in the future, may cause unnecessary and otherwise avoidable stress to the family as well as undermine their well-being.

Other alternatives

There are many alternative paths that do not carry the risks that restrictive transfers do, while preserving both the family business and the family itself. The identification of such alternatives should begin with a serious analysis of the transferor's goals in making a property disposition, as well as an analysis of the family's relationship style. Often, it becomes apparent that less restrictive devices are more effective in accomplishing the transferor's purpose while avoiding the downside of a restrictive transfer. In the example above, the father imposed on his children a governance structure for the family business. This imposition may imply a concern over the children's ability to cooperate. If that is the underlying reason for the imposition, the desirability of transferring any asset to them in some form of joint ownership may not be the right course. But if, after further analysis and discussion, it appears that the siblings might be able to learn to work together, an intermediate approach may carry the most potential. For example, the father could transfer certain limited management and ownership rights to the children while he is alive, but retain some control to intervene and guide the children until some determination can be made regarding their ultimate ability to work together.

Another benefit of a serious analysis of the transferor's goals and family dynamics is less obvious. Upon deeper examination it may become clear that multigenerational family dynamics play a larger role in a transferor's decisions than at first appears. For example, a transferor's birth order (whether the transferor was the oldest, middle or youngest child) and role in the family help explain the degree to which the transferor tends to overstep the boundaries of his or her areas of responsibility. Another example is a family in which irresponsible behavior and decision making from a young family member in a previous generation jeopardized the business. This past experience might explain a transferor's apprehension about giving authority to the next generation. Awareness of these factors (family history, habits, fears, values and strengths) may lead the transferor to assess the extent to which decisions regarding property dispositions are based on past events rather than on a realistic evaluation of the present circumstances.

An experienced professional can contribute a great deal in crafting an effective asset transfer process (whether by estate planning or otherwise) by encouraging an in-depth examination of the transferor's goals and family situation. It should be acknowledged that the success of an intergenerational transfer is never guaranteed. Nonetheless, the prognosis is better if a transferor, aided by professional expertise, considers the characteristics, history, strengths and vulnerabilities of both the business and the family involved. Exploring possibilities other than restrictive transfers may provide, in the long run, a better chance of achieving the transferor's goal of preserving and strengthening the family as well as the family business.

Mariana Martinez Berlanga, Psy.D., operates Bethesda Family Therapy in Bethesda, Md. (www.bethesda, and is on the faculty of the Bowen Center for the Study of the Family in Washington, D.C. Peter M. Bloom, Esq., operates The Bloom Group LLC in Washington, D.C. (

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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A tax-efficient way to transfer your business

Estate tax “freeze” techniques offer great flexibility for the senior generation to protect and oversee business operations as the younger generation eases into operational control. The owner of a successful family business can use these techniques to transfer appreciating assets to the next generation or to key employees.

The goal is to maintain the value of the business while avoiding a double level of corporate taxation and minimizing gift and estate taxes. There are a variety of ways to structure an estate freeze, such as recapitalizing the business, setting up a grantor-retained annuity trust or making an installment sale to a trust or family member. Although the adoption of any transfer technique must depend on the specific circumstance of the transferring business, one variation of a recapitalization, often called a “drop and freeze” transaction, is designed for owners of closely held businesses, especially those organized as C corporations.

The C corporation conundrum

Many small and family-owned businesses are organized as C corporations, but there are more tax and non-tax advantages to being a limited liability company (LLC) or partnership. Consequently, according to Internal Revenue Service data, the number of businesses filing tax returns as C corporations has declined almost 16% over the past three decades, while the number of businesses organized as partnerships or LLCs has increased more than 55% over the same period.

As the owners of older family-owned C corporations begin to contemplate various exit strategies, such as a sale or transition to the next generation of owners, the corporate form poses several problems:

• A sale of the corporation’s assets will create a double level of tax on capital gains—once at the corporate level and again when the assets are distributed to the shareholders in a liquidation of the corporation or as a dividend.

• Gifts of valuable corporate stock are subject to federal gift tax at rates as high as 35%.

• The owners of a rapidly appreciating asset, such as a successful small business in any form of entity, face an ever-increasing estate tax liability as the value of their estate increases.

The drop and freeze solution

Many small businesses use the drop and freeze transaction to solve these problems. In this transaction, an existing C corporation contributes its operating assets to an LLC or partnership in return for a “frozen” partnership interest. As part of the transaction, two classes of equity are created in the partnership: (1) a preferred interest that is “frozen” in value and pays a fixed and certain rate of return, with little participation in equity growth; and (2) a common interest that enjoys all of the income, growth and appreciation above and beyond the preferred return.

For estate tax purposes, this technique can effectively “freeze” the current value of the preferred business interest within the owners’ estate. The common interest transfers the desired portion of the appreciation in the business to family members and employees at a reduced tax cost. The common interest is generally structured without voting rights and with restrictions on its transferability. As a result, the common interests have valuation discounts for lack of control and marketability, allowing them to be sold or transferred at a lower value.


While the procedures in any specific case must be tailored to the facts of the business and the needs of the transferor, here are the steps in implementing the technique:

1. Transfer assets to the LLC. The existing C corporation contributes all of its operating assets to a wholly owned LLC in exchange for 100% of the membership interests in the LLC. Initially there are no tax consequences, because the LLC is wholly owned by the corporation. The LLC now owns all of the assets necessary to conduct the corporation’s business. Owners may consider a Subchapter S election for the corporation as part of this restructuring.

2. Assess the asset value. After the corporation’s assets are transferred to the LLC, the value of the assets is assessed to determine the potential gift tax consequences of a gift or sale of the LLC interests to family members. The LLC will be treated as a partnership for tax purposes when the interests are later transferred to family members and employees.

3. Structure the preferred and common interests. After the assets are valued, the two LLC equity classes—the preferred, or “frozen,” interest and the common interest—are set up. The preferred interest must generally carry a preferred return that entitles the holder to a priority payment of the LLC’s cash flow. The preferred return would have priority over other distributions and would be paid to the corporation first. One disadvantage of the drop and freeze is that this preferred return is subject to the corporate double level of tax. As a result, many LLCs make the preferred return as low as possible without its being commercially unreasonable.

4. Begin buying down the corporation. The owners begin a gradual buy-down of the corporation’s equity through allocations of the LLC’s cash flow. This process attempts to “freeze” the taxable value of a business within a taxpayer’s estate so that future appreciation is transferred to family members and employees free of tax. Using the asset value established when the corporation’s assets were transferred to the LLC, this “invested capital” amount would be paid down over time as the stockholders of the corporation are gradually bought out.

5. Complete the asset transfer. During the buy-down, the corporation continues to receive a preferred return as described above. However, as payments in excess of the preferred return are made to the corporation over time, its invested capital is bought down until reaching zero (or some other minimal level desired by the owners), and the corporation is bought out of the LLC at a nominal amount. The result is an effective and tax-efficient transfer of wealth to younger generations or key employees.

Gift tax issues

Any succession planning strategy, including the drop and freeze, must comply with Chapter 14 of the Internal Revenue Code, which provides that the transaction must meet certain tests in order to be considered a bona fide business transaction and not a taxable gift. That is especially so when family members receive interests in the LLC, regardless of whether the LLC common interests are purchased for fair market value or given for no consideration.

In general, the value of the common interests must be at least 10% of the total value of “frozen” or preferred interest. Thus, if the value of the preferred interests in the LLC is $10 million, then the common interests must be valued (for gift tax purposes) at a minimum of $1 million. Chapter 14 also requires that the common interest transfer:

• Is a bona fide business arrangement.

• Does not transfer the assets for less than full and adequate consideration.

• Compares with similar arrangements that would not involve family members.

All three of these tests are presumed to be met if the agreement is only between unrelated individuals, such as non-family key employees. If common interests are issued or sold to key employees at the same time as they are issued to family members, and if each interest transfer is commensurate with the recipient’s role in the LLC, there is less likely to be gift tax liability. However, if family members receive preferential treatment, it is more likely that at least a portion of the equity grants would be considered a gift.

Looking toward the future

The partnership drop and freeze must be carefully structured to comply with the relevant laws and regulations in order to avoid adverse gift tax consequences. It should be done in consultation with a competent legal adviser. However, if done correctly, the estate freeze transfer can be accomplished while minimizing gift tax on the asset appreciation. The drop and freeze can thus be an effective strategy to preserve hard-earned financial assets and ensure that the family business is well positioned for the future.

Jeffrey A. Markowitz (left) is a principal and Christopher A. Davis is an associate in the Tax and Wealth Management group at Miles & Stockbridge P.C. They are based in the law firm’s Baltimore office (

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact



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Multiple marriage planning

The family tree today looks much different than it did 50 years ago. Divorce and remarriage have caused new branches to take root and extend in different directions. Stepchildren are everywhere!

There have been other changes, as well. Consider the increased prevalence of medically assisted procreation, and of acknowledgment of children born out of wedlock. There are also more “dynamic adoptions” (grandparents raising their grandchildren owing to unstable family circumstances). Gay family members are coming out of the closet in increased numbers, and many of them are forming family units complete with children. Compounding these changes is the fact that people are living longer than they did 100 years ago.

The two family trees shown here demonstrate the changes in the institution of “family” over the last half-century. This new paradigm has dramatically affected estate planning concepts. Many family business owners are concerned about the effect of estate taxes, but tax considerations are not the only complicating factor. The “simple will” is going the way of the dinosaur. It is unrealistic to expect a form-driven document to be anything but a disaster.



Estate planning implications

Estate planning today means giving attention to three or more generations of the family on a simultaneous basis. Today’s family is more like a “group” than a “unit.”

Multiple marriages tend to create multiple “sets of children.” Complexity increases when both spouses have shared children with more than one partner—which may, or may not, include the current spouse. Stepparents and stepchildren are now typically part of the estate planning equation. Children living in the home often have labels such as “his,” “hers,” “ours” or “somebody’s else’s.” Medically assisted procreation, of course, could have a wide range of ramifications. Families and their estate planning professionals must evaluate such situations on a case-by-case basis.

Common misperceptions

Estate planning professionals often hear the following statements from their clients. Comments like these raise a red flag.

• “We have agreed to leave everything outright to each other. The surviving spouse will leave it equally to all of our combined children.”

• “I love my wife’s [husband’s] children like my own.”

• “My children are already well-provided for by the half of my assets I had to give to their mother [father] in our divorce.”

• “His [her] ex-wife’s [ex-husband’s] family is wealthy and will take good care of those children.”

• “I am scared to give [or leave] assets to my children from my prior marriage because my ex-wife [ex-husband] will talk them out of their money.”

• “I want to keep my assets in the bloodline because my father/grandfather would want it that way.”

• “I don’t want to include adopted children in my estate plan unless I have a chance to know them.”

• “Stepchildren aren’t my grandchildren.”

• “… born in wedlock.”

• “…natural-born children.”

The ‘evil stepmother’ myth

The “evil stepmother” immortalized by the Grimm brothers and, later, by Walt Disney infected many generations with unnecessary prejudice. Family psychologists and therapists have begun to recognize the prevalence of stepfamily situations. Several excellent books have been written on this topic, including Stepfamilies, by James H. Bray and John Kelly (Random House, 1999) and Becoming a Stepfamily, by Patricia L. Papernow (Jossey-Bass, 1993).

Relationships within a stepfamily are very subjective, qualitative, delicate, ambiguous and changing in nature. They include forced relationships, as well as relationships filled with genuine love and affection.

Age differentials between stepparents and stepchildren can be important factors. A combination of stepchildren and “our” children can have serious repercussions within the relationship matrix. The death, incapacity or divorce of the biological parent will likely have serious repercussions in the ongoing stepparent-stepchild relationship.

The standard will and trust phrase, “If any child of mine is not survived by children or other issue …,” will automatically disenfranchise stepchildren, regardless of the nature and quality of the relationship. This is often undesirable —and it’s often unintentional. In any event, it is worthy of discussion.

The trust trap

Trusts are frequently used to preserve and protect financial resources for the surviving spouse before substantial distributions are made among the children. Increased longevity, however, suggests that this typical pattern may be inappropriate. Rich widows tend to live to a ripe old age. This can postpone financial benefits for children until they are much too old to appreciate the financial windfall. This is an especially glaring problem when substantial financial resources are available for shared enjoyment among two or more generations of the family simultaneously. Estate planners are often guilty of allowing estate tax considerations to drive the plan.

Consider the planning complexities associated with stepparents and stepchildren. In many cases, financial resources are preserved for a surviving spouse, and assets are not distributed to children from a prior marriage until after that spouse has died. This may not make sense, however, if the surviving spouse is not substantially older than such children. In addition, there is an inherent conflict of interest between the surviving spouse as lifetime income beneficiary and the children of a prior marriage as remainder beneficiaries. Estate planners and clients should consider better alternatives.

• Life insurance policies can provide “excess funds” that can be distributed to children of a prior marriage so they will not have to wait for a stepparent’s death.

• Making children of a prior marriage beneficiaries of a portion of qualified retirement plans might be an attractive alternative.

Go ahead and face the tough decision of dividing financial assets between and among the surviving spouse and the children from a prior marriage or relationship. Do not be tempted to allow estate tax issues to derail an otherwise perfectly logical plan of action. Don’t be so sensitive about equal sharing with children of the current marriage—it can’t be done.

The timing and value of different assets will thwart plans of this nature. Control over asset distributions will change over time. Priorities will also change. Relationships between a surviving stepparent and stepchildren will likely change after death of the common denominator spouse-parent.

Advisers’ changing roles

Increasingly, estate planners are called upon to exercise multidisciplinary skill sets associated with sociology, behavioral science and psychology. Trusted advisers must be sensitive to family relationships and have an appreciation for family system dynamics.

Estate planning should be holistic and should encompass a process of communication within the family group. Assessment, evaluation and interviews with appropriate family members must be a part of the overall planning process. There is no excuse for the intentional, or unintentional, focus on mechanical and technical aspects of wills, trusts and document drafting. This often leads to the subliminal avoidance of the real issues, hidden agendas and future disasters.

Teamwork with qualified sociologists, behavioral scientists and psychologists is recommended in many cases. The existence of important “soft-side issues” cannot be denied in cases of multiple marriages, multiple sets of children and other special family dynamics.

Dealing with these issues will bring the estate planner into the den, kitchen, bedroom and closet. But that is where important decision-making is done.

Points to consider

There are many species of family trees. The definition of a nurturing and healthy family has been broadly expanded. Estate planning must have broader parameters to include a wide variety of circumstances and possibilities.

• Standard document provisions do not fit dynamic family circumstances. This is now the norm rather than the exception.

• In the most cases, family relationships are more important than estate tax considerations.

• Inherent and natural conflicts of interest associated with multiple marriage situations must be identified and discussed.

• The “all to spouse in trust or outright” will form is often a poor choice.

• Extra life insurance can be a relatively inexpensive planning option that can have remarkable benefits for the family.

• Unique and complex planning tools, such as charitable trusts and asset protection trusts, can provide differing financial benefits for various members of a family.

• Equal money does not define equal love.

• Stepchildren are people, too.

• No, the surviving spouse is not automatically entitled to receive everything.

• Special planning is required in the case of gay families (or gay family members).

• Longevity is an important factor in the estate planning process.

• Mental incompetence and undue influence are significant dangers to consider.

Estate planning for the dynamic family is a craft, an art, an expertise and a necessity. Sharing family wealth cannot be addressed with canned documents. Issues associated with death and relationships require a focus that goes beyond tax planning.

Joe M. Goodman is an attorney, a CPA with Personal Financial Specialist designation and a family business consultant with the Nashville office of law firm Adams and Reese LLP (

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact



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Autumn 2011 Openers

Wellington R. Burt of Saginaw, Mich., really must have disliked his relatives.

Burt, who died in 1919, was a lumber baron who invested in iron mines, railroads, the salt industry and foreign bonds. He was once named one of the eight wealthiest men in America. A probate judge estimated his estate to be worth $100 million to $110 million. But those assets would not go to his children or grandchildren.

Burt’s will, which he wrote in longhand and signed in 1917, stipulated that his fortune not be distributed to his heirs until 21 years after the death of his last surviving grandchild. It took 92 years before the disbursements were cleared to begin.

Burt’s last grandchild, Marion Stone Burt Lansill, died in November 1989. In May 2011, Saginaw County Chief Probate Judge Patrick McGraw made his last ruling in the case, enabling the estate to finally be divided among three of Burt’s great-grandchildren, seven great-great-grandchildren and two great-great-great-grandchildren.

As the nearly century-long saga finally drew to a close, the Saginaw News published a series of articles on Burt, his descendants and his will. Those reports attracted the attention of the national and international media. Many wealthy people have used their last will and testament as a way of punishing or controlling their heirs, but Burt’s measures were extreme enough to cause a global sensation.

Burt’s motivation for inserting such an onerous clause in his will seems to be lost to history. If he intended for his great-, great-great-, and great-great-great-grandchildren to remember the alleged transgressions of their forebears, he appears to have failed at that mission.

His heirs were not the only ones to suffer from his vindictiveness; the town of Saginaw also felt his wrath. At one time, Burt served as the mayor; later, he became a state senator. He funded a municipal auditorium, a women’s hospital, a Salvation Army facility and a YWCA in Saginaw. But he canceled bequests to the town after assessments of his personal property were hiked from $400,000 to $1 million in 1915, according to the Saginaw News.

He did leave a relatively small annual allowance to his children and grandchildren, the newspaper reported. A “favorite son” got $30,000 per year, but the others got only $1,000 to $5,000 annually. His cook, housekeeper, coachman and chauffeur, by contrast, each received $1,000 per year, and his secretary got an annual allowance of $4,000. (One of Burt’s daughters was originally slated to receive a $5,000 annuity, but Burt revoked it because of a disagreement over her divorce.)

As one would expect, various descendants challenged Burt’s will over the decades. In 1920, a son, three daughters and four granddaughters used a Minnesota statute to secure $720,000 in cash and title to iron mine leases in that state, which were valued at $5 million. In 1961, another $700,000 from Burt’s estate was used to settle a suit filed by nine descendants and the estates of three others, the newspaper reported. The state Supreme Court was asked to review the validity of the trust twice.

Divvying it up

Genealogical research was required to identify the 12 bona fide heirs out of 30 people who claimed to qualify for a piece of the inheritance. (The Saginaw News report said the parties were motivated to resolve their last point of contention quickly for fear that more faux heirs would come out of the woodwork.)

Judge McGraw ruled that the beneficiaries should decide for themselves how Burt’s estate would be divided. Their attorneys —about 20 in all—determined that the older heirs with the fewest siblings would get larger percentages. Shares range from 2.6476% ($2.6 million to $2.9 million) to 14.583% ($14.5 million to $16 million), the Saginaw News reported.

The youngest of Burt’s heirs who benefited from his estate was 19 at the time of the May disbursement; the oldest was 94, according to the newspaper’s account. They live in eight different states, from Connecticut to California. Only one lives in Michigan, Burt’s home state. Some of them had never met each other before they learned they’d be splitting the inheritance. Several of Burt’s descendants who would have qualified for a piece of the estate died before the end of the 21-year waiting period.

Did Burt’s spiteful will contribute to the scattering of the family? The answer to that question may never be known, but the facts of the case lead those of us in the family enterprise world to speculate on what might have been.

If Burt’s children and grandchildren had been given access to the lumber baron’s wealth—and the opportunity to learn about stewardship—the extended family might have kept in contact. If they had been able to invest the money as a family unit, they might have been able to grow their collective fortune beyond its current $100 million value. A family foundation might have enabled the Burts to build a legacy rivaling that of the Rockefellers.

Instead, Wellington R. Burt earned himself a global reputation as an ill-willed curmudgeon.








The stat

43% of respondents in a survey of small-business owners cited the economic downturn as a reason for recruiting a relative. The survey was conducted by Hiscox, a specialty insurer based in Bermuda and listed on the London Stock Exchange.





The scoop

The Family Firm Institute, a global association of professionals serving the family enterprise field, turns 25 this year. Practitioners and academics will celebrate the milestone and discuss best professional practices at FFI’s annual conference on Oct. 12-15. The conference will be held in Boston, where FFI is based.





Family Business Magazine receives editorial awards


Family Business Magazine was recently honored with several awards for editorial excellence.

“The accidental CEO,” by Margaret Steen (FB, Spring 2010) received a Gold editorial award in the Focus/Profile Article category in the national Tabbie Awards competition. The Tabbies are presented by Trade Association Business Publications International.

Steen’s article also received a Regional Silver Azbee Award of Excellence (Individual Profile cateogry) in the annual competition of the American Society of Business Publication Editors (ASBPE).

“A family summit gets the succession conversation started,” by Josh Wimmer (FB, Spring 2010) received a National Gold Azbee Award (How-To article category) in the ASBPE competition.

“Money wasn’t enough,” by Barbara Spector (“From the Editor” column, FB, Spring 2010) received a national Apex Award for Publication Excellence in the Editorial & Advocacy Writing category.





Destroyed by fire after 144 years


Store owner Maurice Reeves ponders the rubble that once was his family’s furniture store, House of Reeves, in the London Borough of Croydon. The store, which had stood on the same corner since 1867, was destroyed by fire that erupted in August after protests over a police shooting.

The Reeves furniture store was a local landmark; the part of the street on which it stood was known as “Reeves Corner.”

The Reeves family told the Croydon Advertiser that they planned to reopen. “I feel like I have gone through the whole range of emotions,” Maurice’s son Trevor told the local publication. “At first it was abject misery and despair, and then it was vicious anger at the people who did this. Now I just want to focus on the future and where we go from here, so that we can sustain the business and take care of our staff and their families, and our customers.”













“We did a deal with the devil and it really saddens me [that] the editorial of this quasi public trust that has been on the vanguard of world journalism for years is not in good hands. That I am really struggling with.”


— Bancroft family member Bill Cox III, reflecting on the sale of the Wall Street Journal to News Corp. in the wake of the News Corp. phone-hacking scandal (ProPublica, July 13, 2011).






“The Bancrofts were admirable owners in many ways, but at the end of their ownership their appetite for dividends meant that little cash remained to invest in journalism.”


Wall Street Journal editorial, responding to the ProPublica article and other criticisms of News Corp. (July 18, 2011).





“It has to stay in the family. I put it in trust. They can’t touch it. They can’t sell it. The [SOBs] are going to run it, or they’re going to starve.”


— Joe “Doc” Mattioli, founder of the Pocono Raceway, discussing his plans to have his children and grandchildren inherit the property, an independently owned NASCAR Sprint Cup track (Philadelphia Inquirer, June 9, 2011).






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Test your planning with a "fire drill"

No doubt your business has a fire evacuation plan prominently displayed in your office. You may have emergency contact names and numbers posted as well. Your company probably conducts safety drills a couple times a year. You might even have held a fire drill at home with your family.

But have you ever conducted the same type of safety drills for your business and family—an estate and business succession “fire drill”? I have been advising families on “what if” scenarios for years and have also been involved in what happens in “real life” when an owner dies.

Have you ever wondered what would happen to your company— and, more important, what would happen to your family—if today were your last day at the office? If you don’t make it back to the office tomorrow, who would be the company’s “go-to” person? After the death of a family member or a critical business team member, numerous decisions must be made, and they must be made quickly.

Testing your awareness

How familiar are you with the contents of your estate planning documents? Take this short quiz:

When was the last time you:

• Read your will? (Did you discuss it with your spouse?)

• Asked whether or not your children have up-to-date testamentary documents? (Are you and your spouse named as guardians of your grandchildren? If so, is this still acceptable to you?)

• Read your trust agreements?

• Looked at your buy/sell agreement and other succession plan -documents?

• Reviewed your bank loan documents and lines of credit to determine what would happen when a “material change in ownership” takes place?

• Discussed your surety bonding arrangements?

• Reviewed your life insurance contracts and updated the beneficiary information, if necessary?

• Drew up a listing of passwords and other important documents and reviewed where they are located?

Planning a fire drill

A client (I’ll call him Steve) recently asked me to develop an estate planning fire drill for him. A friend of Steve’s, also a business owner, had just died. Steve’s company was involved in several joint ventures with his friend’s business.

For weeks after his friend’s death, Steve heard the deceased’s children complain about how unfairly their father had treated them in his will. The children fought about who would run the company and how they would pay the transfer taxes on the business. Steve was appalled that they seemed to care more about themselves than about the needs of the company or their stepmother. Steve requested a fire drill in an effort to prevent such behavior in his own family.

I had three weeks to plan Steve’s fire drill. As recently as seven months prior, we had put forth some major changes to this family’s estate and business succession planning. Family members who were crucial to the process were all involved and had input into the final documents.

Steve wanted us to act as if he had just passed away. We planned that his family members, plus all his critical business advisers—his attorney, CPA and financial adviser (me)—would be called to a meeting. We decided against inviting bankers, surety bond agents and key non-family management personnel for reasons of privacy. We also wanted to make sure they didn’t ask questions about holes that more than likely would be discovered. And yes, we found a number of critical ones. We wanted to make sure we “repaired the bridge” before we brought in these other advisers.

Steve told me he wanted his will and all the trust documents read and explained at the fire drill. I explained that he was taking a major risk in showing his family everything while he was still alive. I was impressed with his response. He said he understood the ramifications completely and that he welcomed the opportunity to explain to everyone precisely how he felt.

For our fire drill, the rules of engagement were straightforward. The entire family was flown in to town and was to pretend Steve had died over the past weekend. We tried our best to make this as realistic as possible; Steve sat quietly (for the most part) at the head of the conference room table while we all acted as if he was no longer with us. After about 20 or 30 minutes, Steve “came back to life” and began to talk.

We took some time to diagram the estate, the business and all of the assets on an easel. Beforehand no one had really paid attention to the “boring but necessary” parts of the documents. Yet in this type of exercise, even the smaller details beg to be explained.

Lessons from the exercise

To say that the family members’ eyes were opened regarding a few important details is an understatement.

• Steve’s son “Brian,” the heir apparent, wanted advice on how he would make critical decisions. Although Brian is a very capable successor, everyone present at the fire drill could tell he was nervous about discussing his future role while his mentor was sitting less than six feet away, still very much alive although pretending otherwise. Steve sensed this tension and coached Brian to work through his fears. As I observed them, I thought of other next-generation business leaders who have lost their parents; how many of them wish they had had the opportunity to have such a conversation?

• Steve’s wife had concerns about the trust and wanted the will explained in detail. Once she realized the majority of the assets in the trust would be in cash or conservative investments and would give her access to significant income to replace Steve’s income from the company, she was relieved and thankful for the planning.

• Everyone, including the other children, wanted to know how they were treated in the will and the various trust arrangements. We illustrated the process with actual numbers. As the discussion progressed, I could feel the tension that had filled the room at the outset disappearing, replaced by a sense of calm and constructive participation.

From the family discussions during the fire drill, we realized that Steve and Brian do not talk about the business strategy enough. As Brian attempted to describe what strategies might be implemented in the first six to 12 months after he took the helm, we found huge differences between his vision and Steve’s vision. To resolve these issues, Steve’s wife suggested that Steve and Brian meet for lunch each week. The family also decided to have family council meetings and off-site staff retreats at least annually. It was suggested that the first retreat would lend itself nicely to a follow-up fire drill to see how the critical team members would react if Steve were to die suddenly.

After the fire drill, the other advisers and I received phone calls and notes of gratitude from the various family members. They said we had helped them understand a very cumbersome process and that they were glad that they have time to fix a few critical flaws while Steve remains with us, alive and well.

All business families can benefit from a fire drill. Because new events occur and information changes so often, it’s a good idea to repeat the drill every two years.

Business owners who are not comfortable disclosing so many details of their estate plan might consider first meeting with their key advisers to “sanitize” the information before presenting it to family members or top managers.

Long-range implications

It’s also important to note that your clients and major vendors will be wondering what’s next for your company when you are no longer there. It’s a good idea to introduce them to your successor and share some aspects of your plans.

You no doubt spend considerable time and money preparing short- and long-range sales forecasts for your family business. You meet with your key personnel regularly to make certain everyone’s on target. Why not give your family the same attention to detail? Dust off and review your personal planning documents, and then plan your fire drill. You will be just as energized by the outcome as Steve and his family were.

John R. McAlister is an adviser with Clarus Financial Group in Roswell, Ga. ( He is also a registered principal with FSC Securities Corp., a registered broker/dealer, member FINRA and SIPC. (Not affiliated with Clarus Financial Group LLC).

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Be aware of administration issues and plan your estate accordingly

Much attention is devoted to estate planning strategies that aim to reduce a family business’s exposure to federal estate taxes and similar state levies. These strategies include such mechanisms as grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs), family limited partnerships and limited liability companies. The focus of such discussions tends to center on the “transactional” aspects of the techniques and the associated financial projections.

Yet almost all estate planning for family business owners will, at some point, involve the ownership of some or all of the family business within a decedent’s estate or a trust. Lifetime estate planning techniques, such as outright gifts, GRATs and IDGTs, will involve some ongoing ownership of a family business interest in trust. In addition, many family business owners will continue to own at least some of the family business at the time of their death, such that an owner’s executor will hold a family business interest as part of the owner’s estate.

It is therefore important for family business owners to be aware of the issues that often arise in the context of administering family business interests within estates and trusts, and to work with their advisers to make that administration as effective as possible.

Fiduciary duties

The most pervasive issue relates to the role of the executor or trustee (collectively referred to here as “fiduciary”). The laws governing fiduciaries place a significant duty upon the fiduciary to hold an estate’s or trust’s assets in a manner that preserves and protects the assets. In the context of a decedent’s estate, this can mean the executor’s liquidation of assets into cash as soon as is practicable after death. In the context of a trust, it generally requires proper diversification of assets to minimize risk. These duties are frequently inconsistent with the holding of a family business interest in an estate or trust, since a family business interest is inherently risky, and a tension therefore exists.

That tension can be reduced by prudent drafting of the will and trust documents. Where it is expected that an estate or trust will own business interests, the will or trust document should make it clear that the fiduciary can continue to hold the family business interest without violating the executor’s or trustee’s fiduciary duties.

Wills and trusts should also contain provisions that allow fiduciaries to work effectively with a family business interest. State statutes governing the administration of estates and trusts are often restrictive or unclear in matters involving operating a closely held business. In some cases, such statutes necessitate judicial involvement in decision making with regard to such interests. The restrictions and limitations imposed by these statutes can be overcome by proper drafting of administration provisions that clearly delineate the powers of the fiduciary, and that obviate the need for court approval.

It is important for the family to know that the fiduciary will be the owner of the family business interest and may perhaps have control over fundamental decisions (appointing a board, selling the business, etc.). This can be a concern to most family business owners. The family business governing documents, such as shareholders’, partnership and operating agreements, should be established to ensure that the fiduciary is not in a position to wield more control than is desired over the ongoing affairs of the business.

Tax management is also a consideration that needs to be addressed. This is particularly an issue for businesses that operate as an S corporation, or intend to operate as such, since S corporation status is available only if all shareholders are “eligible” shareholders. Estates and trusts can be eligible shareholders, but wills and trusts must include certain provisions to help ensure that the estate or trust will qualify as an eligible shareholder.

Selection of executor or trustee

Generally, the universe of executor or trustee candidates includes family members, friends, professionals and trust companies. When closely held business interests are involved, that universe shrinks, because most professionals and trust companies are reluctant to oversee illiquid investments such as a family business interest.

The selection of the fiduciary will depend in part on the structure of the family business. If the family has been able to develop a management succession plan, the fiduciary will be less involved in day-to-day operations, and thus familiarity with the business is less of a prerequisite. Without a succession plan, the fiduciary may need to become very involved, in which case that person should have a strong understanding of the business.

Valuation and liquidity

One of the first tasks in administering a family business interest as an asset of a decedent’s estate or revocable trust is determining the business interest’s value for estate tax purposes. Although many buy-sell agreements provide that the value of a family business interest will be determined by agreement of the owners (using an agreed-upon formula), the Internal Revenue Service will generally not respect such agreements for federal estate tax purposes. It is quite conceivable that the value of a family business interest for federal estate tax purposes will be higher than the price to be paid in a family buy-sell agreement (“phantom value”).

This disconnect doesn’t mean that family buy-sell agreements should not determine the value for buy-out purposes. It does suggest that families may want to consider setting a purchase price under a family buy-sell agreement that more closely reflects the fair market value of the business interest. Further, the will and trust provisions of the deceased owner (i.e., the selling owner under a buy-sell) should direct who would be responsible for paying the estate taxes on the phantom value, in order to avoid inequities.

Another issue involves liquidity to pay estate taxes or other expenses. The will and trust administration provisions should provide clear authority to the fiduciary to borrow money and to pledge business assets as collateral. This would also include authority to make an Internal Revenue Code Section 6166 election, which essentially allows qualifying estates (i.e., those with significant closely held business interests) to borrow money from the IRS at discounted interest rates. With respect to trusts established and funded during the decedent’s lifetime, the provisions of those documents should be coordinated so that the trustee can work with an executor or similar fiduciary to provide liquidity via purchase of assets from, or lending of money to, a decedent’s estate.

Active and passive heirs

Many family businesses will have some heirs who are actively involved in the family business, and some heirs who are not. To address the passage of family business assets in an equitable fashion, many families will use life insurance, buy-sell agreements or lifetime intrafamily purchase mechanisms, such as GRATs or IDGTs.

Whatever planning is used to accomplish the appropriate distribution, care must be taken to ensure that the administration provisions of wills and trusts are consistent with the plan, thus allowing for the fiduciary to effectively implement the planning strategies. The tax payment clause of a will or revocable trust might direct that the active heirs pay any death taxes on phantom value. Similarly, if the deceased business owners still had a small but controlling interest in the family business, the documents should make it clear that the active heirs will be allocated that interest in distributing the assets of the estate or revocable trust, thus avoiding unnecessary conflict between the active and passive heirs. In the case of real estate leased to a family business, the real estate might be allocated to the active heirs’ share in order to avoid conflict.

Key factors

Planning for the efficient transfer of family business interests requires not only proper selection of transactional techniques, but also proper establishment of administration provisions within the wills and trusts that will eventually govern the management and disposition of those assets. Appropriate consideration of those factors can be essential to the proper management of the family business, and the implementation of a family’s overall estate plan.

Michael W. Mills is a partner in the law firm of Antheil Maslow & MacMinn LLP in Doylestown, Pa. (

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A balanced approach to estate planning

In our work over the years with family-owned enterprises, we have encountered a number of different philosophies and approaches to estate planning, which is one of the critical components of a successful transition from one generation to the next. In some cases, a concern with saving on estate taxes dominates the planning process and has excluded from consideration other factors, such as the impact of the plan on the family and the business. We have found when this occurs, it always presents problems down the road, if not a complete implosion of the plan, and any success at saving taxes is negated.

We advocate a more balanced approach that not only emphasizes saving estate taxes but also anticipates various issues that may arise for the family and the business when the transfer of ownership through future generations is plotted out. We feel this more balanced approach is critical to making sure all the hard work bears the desired fruit.

Legal and financial aspects

Issues that often bedevil family business estate planning —such as whether children who are not working in the business will own company stock and when, how and to whom control will be passed—often are sticking points and require careful thought and consideration.

Financial issues, such as whether parents will have adequate financial resources to live the lifestyle they aspire to and their continued financial security if long-term medical care or other issues arise, are vital to the senior generation’s peace of mind when considering turning over ownership and control of the family -business.

Since the beginning of 2009, various estate tax legislative bills and pronouncements have emphasized the need to update estate plans and provide the necessary liquidity strategy so the business or other vital assets are not forced into liquidation to pay an estate tax bill. Here is often where families stray from their values and goals to save tax dollars and find themselves missing their objective or taking undue tax risks that are outside of the “sleep well at night” zone.

A wise man once observed, “With wealth comes complexity; therefore, clarity is critical.” Clarity comes from the family’s deeply held values regarding financial matters. These values should drive the estate planning engine. Since the estate plan is a message to future generations, that message should be deeply personal to its authors. Having said that, minimizing taxes is not only a deeply held visceral belief of many entrepreneurial business owners, but also may make the difference in whether a business survives to the next generation and beyond. A multimillion-dollar tax bill paid with after-tax dollars can force a business into liquidation or at least into a difficult cash flow position with other creditors for a long time.

Numerous strategies exist to minimize the estate tax impact while thoughtfully implementing the family’s business succession goals. Strategies such as grantor retained annuity trusts (GRATs), installment sales, intrafamily loans, sale to a defective trust, creating “downstream companies” and creative uses of life insurance are but a few tools being used today to minimize the estate tax bill. These strategies can significantly reduce the burden of the tax and allow the business succession plan to move forward without an anchor of debt.

As important as it is to have an estate plan, it is even more important that families annually update their plan. As we say to our clients, the plan is a “snapshot”; your life is a “video.” Any plan requires attention on an ongoing basis. Estate plans should be revisited and reviewed annually with four important questions considered:

1. Have there been major family changes?

2. Have the economics of the estate make-up changed?

3. Have there been changes in the tax law or environment that could impact the plan?

4. How are the existing implemented strategies working out?

Any one of these four questions could require significant additional tweaking so that the plan will be as sound five years in the future as it was when implemented.

Impact on the business

One of the most difficult conundrums we have seen clients get into is to opt for the IRS provision that allows an estate tax liability to be paid out over a number of years. In many cases this is attractive because the tax bill is substantial if not overwhelming. For some family businesses, there seems to be no choice—in fact, there may not be. If the amount of cash required to service this debt is large compared with the cash flow the business normally produces, there is a high risk that at some point over the term of the payout, the company will not be able to consistently meet this obligation given the vicissitudes of business cycles. Even if the debt obligation can be met, it is a poor use of capital. This outlay of cash does nothing to enhance the shareholder value of the business other than to absolve the debt. Meeting capital expenditures may be sacrificed or acquisitions and growth forgone. This debt obligation may put a big hole in the balance sheet.

The second area of high impact relates to the transfer of ownership from one generation to the next. In some cases the plan leaves ownership to a group of people with diverse backgrounds, temperaments, life experiences and business inclinations without providing the necessary foundation for them to work together to optimize what they own jointly. Typically the diversity and number of participants represented in this scenario pose great challenges to the growth and management of the business and family ownership.

A third, related area is when the ownership of the family enterprise passes into a trust with a non-family trustee. While this can be an effective working relationship, in many cases we have found it sets up an unnatural set of cross-purposes between the trustee and the beneficiaries. Multiple trusts simply complicate this issue. If the trustee is not a family member, then the family beneficiaries all of a sudden have a “new partner.” When the trustee is an institution, concerns over exposure and liability of managing a business also come to the surface.

The final area of impact on the business occurs if implementation of the estate plan is triggered through a surprise death or disability. In this case, the imposition of a new set of family owners and ownership structures on an existing business culture with longtime managers requires substantial adjustment on everyone’s part. The new owners may have different ideas about the direction of the business and how things ought to be run. They may or may not have gotten along with the existing managers through the years. The existing managers, on the other hand, may see the new owners as interlopers and feel they know what is best for the business. This potential conflict of values and philosophies can result in marked conflict.

Impact on the family

Our family legacies are tapestries woven from our financial and human capital. We inherit and develop these legacies and pass them on to those who follow us. Both the financial and human aspects of these legacies can be either enriched or weakened by each generation through the experiences, opportunities and systems that elders create for the future stewards of the legacy during “their watch.”

An estate plan is about far more important matters than money. Most family legacies happen by default, but they can be consciously shaped. One of the most common ways we try to shape a family’s legacy is through estate planning.

Ideally, an estate plan creates a way to protect what has been accumulated, and it allows for continued ability to create opportunities for others in the family for years to come. We say at the minimum it ought to create opportunities for joy, not set the stage for grief.

An estate plan is also a cluster of messages that emerge from personal values. Whether memorialized in text or woven between the lines, an estate plan will be full of messages, such as:

• The importance of charity

• The purpose of money

• The significance of heritage

• The importance of family relationships

• Duty to posterity and others

The experience of designing an estate plan can differ widely. The philosophy of the individual’s advisers is inevitably blended with the values, fears, trust and feelings about family members that he or she brings to the experience.

Reactive estate planning. These estate plans are the product of fear. “Control from the grave” might be a theme of this genre of estate planning.

Responsive estate planning. These plans are driven by the desire to please the inheritor. If overindulgence has been part of the family’s life, there may be elements of enabling. These plans run the risk of making children rich before they are mature enough to handle large sums of money.

Proactive estate planning. These plans are driven by the desire to create opportunities for beneficiaries while avoiding over-indulgence.

Interactive estate planning. These plans build in flexible structures and processes that allow for change and modifications of the plan by fiduciaries, such as trustees and trust protectors.

Inspirational estate planning. These plans push the envelope of planning processes. They use financial capital to create human capital.

Estate plan design can be a secret process or an open, balanced and inclusive rite of passage for a family. An estate planner can be a scrivener or an inspired legacy crafter. Choose wisely.

Sam H. Lane, Ph.D., Bill Roberts and Joe Paul are partners in the Aspen Family Business Group (www.aspen Paul is also a family business consultant with MCS Financial Advisors (

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