Is Succession Planning Necessary for Family Business Entities?

Failing to have a succession plan is often the reason family businesses do not survive across the generations. Creating, designing and implementing a succession plan can protect the family’s legacy, according to the article “Planning for Success: How to Create a Suggestion Plan” from Westchester & Fairfield County Business Journals.

Start by establishing a vision for the future of the business and the family. What are the goals for the founder’s retirement? Will the business need to be sold to fund their retirement? One of the big questions concerns cash flow—do the founders need the business to operate to provide ongoing financial support?

Next, lay the groundwork regarding next generation management and the personal and professional goals of the various family members.

Several options for a successful exit plan include:

  • Family succession—Transferring the business to family members
  • Internal succession—Selling or transferring the business to one or more key employees or co-workers or selling the company to employees using an Employee Stock Ownership Plan (ESOP)
  • External succession—Selling the business to an outside third party, engaging in an Initial Public Offering (IPO), a strategic merger or investment by an outside party.

Once a succession exit path is selected, the family needs to identify successors and identify active and non-active roles and responsibilities for family members. Decisions need to be made about how to manage the company going forward.

Tax planning should be a part of the succession plan, which needs to be aligned with the founding member’s estate plan. How the business is structured and how it is to be transferred could either save the family from an onerous tax burden or generate a tax liability so large, as to shut the company down.

Many owners are busy with the day-to-day operations of the business and neglect to do any succession planning. Alternatively, a hastily created plan skipping goal setting or ignoring professional advice occurs. The results are bad either way: losing control over a business, having to sell the business for less than its true value or being subject to excessive taxes.

Every privately held, family-owned business should have a plan in place to establish what will happen if the owners die or become incapacitated.

An estate planning attorney who has experience working with business owners will be able to guide the creation of a succession plan and ensure that it works to complement the owner’s estate plan. With the right guidance, the business owner can work with their team of professional advisors to ensure that the business continues over the generations.

Reference: Westchester & Fairfield County Business Journals (March 31, 2022) “Planning for Success: How to Create a Suggestion Plan”

Talk to Parents about Estate Planning without Making It Awkward

If you don’t have this conversation with parents when they are able to share information and provide you with instructions, helping with their care if they become incapacitated or dealing with their estate after they pass will be far more difficult. None of this is easy, but there are some practical strategies shared in the article “How to Talk to Your Parents About Estate Planning” from The Balance.

Parents worry about children fighting over estates after they pass, but not having a “family meeting” to speak about estate planning increases the chance of this happening. In many cases, family conflicts lead to litigation, and everyone loses.

Start by including siblings. Including everyone creates an awareness of fairness because no one is being left out. A frank, open conversation including all of the heirs with parents can prevent or at least lessen the chances for arguments over what parents would have wanted. Distrust grows with secrets, so get everything out in the open.

When is the right time to have the conversation? There is no time like the present. Don’t wait for an emergency to occur—what most people do—but by then, it’s too late.

Estate planning includes preparing for issues of aging as well as property distribution after death. Health care power of attorney and financial power of attorney need to be prepared, so family members can be involved when a parent is incapacitated. An estate planning attorney will draft these documents as part of creating an estate plan.

The unpredictable events of 2020 and 2021 have made life’s fragile nature clear. Now is the time to sit down with family members and talk about the plans for the future. Do your parents have an estate plan? Are there plans for incapacity, including Long-Term Care insurance? If they needed to be moved to a long-term facility, how would the cost be covered?

Another reason to have this conversation with family now is your own retirement planning. The cost of caring for an ailing parent can derail even the best retirement plan in a matter of months.

Define roles among siblings. Who will serve as power of attorney and manage mom’s finances? Who will be the executor after death? Where are all of the necessary documents? If the last will and testament is locked in a safe deposit box and no one can gain access to it, how will the family manage to follow their parent’s wishes?

Find any old wills and see If trusts were established when children were young. If an estate plan was created years ago and the children are now adults, it’s likely all of the documents need to be revised. Review any trusts with an estate planning attorney. Those children who were protected by trusts so many years ago may now be ready to serve as executor, trustees, power of attorney or health care surrogate.

Usually, a complete understanding of the parent’s wishes and reasons behind their estate plan takes more than a single conversation. Some of the issues may require detailed discussion, or family members may need time to process the information. However, as long as the parents are living, the conversation should continue. Scheduling an annual family meeting, often with the family’s estate planning attorney present, can help everyone set long-term goals and foster healthy family relationships for multiple generations.

Reference: The Balance (Oct. 15, 2021) “How to Talk to Your Parents About Estate Planning”

How to Keep the Vacation Home in the Family

There are several ways to protect a vacation home so it remains in the family and is not overly burdensome to any one member or couple in the family, according to the article “Estate planning for vacation property” from Pauls Valley Daily Democrat.

To begin, families have the option of creating a legal entity to own the asset. This can be a Family LLC, a partnership or a trust. The best choice depends upon each family’s unique situation. For an LLC, there needs to be an operating agreement, which details management and administration, conflict resolution, property maintenance and financial matters. The agreement needs to include:

Named management—ideally, two or three people who are directly responsible for managing the LLC. This typically includes the parents or grandparents who set up the LLC or Trust. However, it should also include representatives from different branches in the family.

Property and ownership rules must be clarified and documented. The property’s use and rules for transferring property are a key part of the agreement. Does a buy-sell agreement work to give owners the right to opt out of owning the property? What would that look like: how can the family member sell, who can she sell to and how is the value established? Should there be a first-right-of refusal put into place? In these situations, a transfer to anyone who is not a blood descendent may require a vote with a unanimous tally.

There are families where transferring ownership is only permitted to lineal descendants and not to the families of spouses who marry into the family.

Finances need to be spelled out as well. A special endowment can be included as part of the LLC or as a separate trust, so that money or investments are set aside to pay taxes, upkeep, insurance and future capital requirements. Anyone who has ever owned a house knows there are always capital requirements, from replacing an ancient heating system to fixing a roof after decades of a heavy snow load.

If the endowment is not enough to cover costs, create an agreement for annual contribut6ions by family members. Each family will need to determine who should contribute what. Some set this by earnings, others by how much the property is used. What happens if someone fails to pay their share?

Managing use of the property when there is a legal entity in place is more than a casual “Who calls Mom and Dad first.” The parents who establish the LLC or Trust may reserve lifetime use for themselves. The managers should establish rules for scheduling.

For parents or grandparents who create an LLC or Trust, be sure it works with your estate plan. If they intend to keep the property in the family and wish to leave a bequest for its maintenance, for instance, the estate planning attorney will be able to incorporate that into the LLC or Trust.

Reference: Pauls Valley Democrat (July 29, 2021) “Estate planning for vacation property”

Common Mistakes when Making Beneficiary Designations

Let’s say you divorce and remarry and forget to change your beneficiary from your ex-spouse. Your ex-spouse will be smiling all the way to the bank. There won’t be much that your new spouse could do, if you forgot to make that change before you die. Any time there is a life change, including happy events, like marriage, birth or adoption, your beneficiary designations need to be reviewed, says the article “One Beneficiary Mistake You Really Don’t Want to Make” from Kiplinger.

If there are new people in your life you would like to leave a bequest to, like grandchildren or a charitable organization you want to support as part of your legacy, your beneficiary designations will need to reflect those as well.

For people who are married, their spouse is usually the primary beneficiary. Children are contingent beneficiaries who receive the proceeds upon death, if the primary beneficiary dies before or at the same time that you do. It is wise to notify any insurance company or retirement fund custodian about the death of a primary beneficiary, even if you have properly named contingent beneficiaries.

When there are multiple grandchildren, things can get a little complicated. Let’s say you’re married and have three adult children. The first beneficiary is your spouse, and your three children are contingent beneficiaries. Let’s say Sam has three children, Dolores has no children and James has two children, for a total of five grandchildren.

If both your spouse and James, die before you do, all of the proceeds would pass to your two surviving children, and James’ two children would effectively be disinherited. That’s probably not what you would want. However, there is a solution. You can specify that if one of your children dies before you and your spouse, their share goes to his or her children. This is a “per stirpes” distribution.

This way, each branch of the family will receive an equal share across generations. If this is what you want, you’ll need to request per stirpes, because equal distribution, or per capita, is the default designation. Not all insurance companies make this option available, so you’ll need to speak with your insurance broker to make sure this is set up properly for insurance or annuities.

Any assets that have a named designated beneficiary are not controlled by your will. Consequently, when you are creating or reviewing your estate plan, create a list of all of your assets and the desired beneficiaries for them. Your estate planning attorney will help review all of your assets and means of distribution, so your wishes for your family are clear.

Reference: Kiplinger (March 23, 2021) “One Beneficiary Mistake You Really Don’t Want to Make”

Estate, Business and Retirement Planning for the Farm Family

The family is at the center of most farms and agricultural businesses. Each family has its own history, values and goals. A good place to start the planning process is to take the time to reflect on the family and the farm history, says Ohio County Journal in the recent article “Whole Farm Planning.”

There are lessons to be learned from all generations, both from their successes and disappointments. The underlying values and goals for the entire family and each individual member need to be articulated. They usually remain unspoken and are evident only in how family members treat each other and make business decisions. Articulating and discussing values and goals makes the planning process far more efficient and effective.

An analysis of the current state of the farm needs to be done to determine the financial, physical and personnel status of the business. Is the farm being managed efficiently? Are there resources not being used? Is the farm profitable and are the employees contributing or creating losses? It is also wise to consider external influences, including environmental, technological, political, and governmental matters.

Five plans are needed. Once the family understands the business from the inside, it’s time to create five plans for the family: business, retirement, estate, transition and investment plans. Note that none of these five stands alone. They must work in harmony to maintain the long-term life of the farm, and one bad plan will impact the others.

Most planning in farms concerns production processes, but more is needed. A comprehensive business plan helps create an action plan for production and operation practices, as well as the financial, marketing, personnel, and risk-management. One method is to conduct a SWOT analysis: Strengths, Weaknesses, Opportunities and Threats in each of the areas mentioned in the preceding sentence. Create a realistic picture of the entire farm, where it is going and how to get there.

Retirement planning is a missing ingredient for many farm families. There needs to be a strategy in place for the owners, usually the parents, so they can retire at a reasonable point. This includes determining how much money each family member needs for retirement, and the farm’s obligation to retirees. Retirement age, housing and retirement accounts, if any, need to be considered. The goal is to have the farm run profitably by the next generation, so the parent’s retirement will not adversely impact the farm.

Transition planning looks at how the business can continue for many generations. This planning requires the family to look at its current situation, consider the future and create a plan to transfer the farm to the next generation. This includes not only transferring assets, but also transferring control. Those who are retiring in the future must hand over not just the farm, but their knowledge and experience to the next generation.

Estate planning is determining and putting down on paper how the farm assets, from land and buildings to livestock, equipment and debts owed to or by the farm, will be distributed. The complexity of an agricultural business requires the help of a skilled estate planning attorney who has experience working with farm families. The estate plan must work with the transition plan. Family members who are not involved with the farm also need to be addressed: how will they be treated fairly without putting the farm operation in jeopardy?

Investment planning for farm families usually takes the shape of land, machinery and livestock. Some off-farm investments may be wise, if the families wish to save for future education or retirement needs and achieve investment diversification. These instruments may include stocks, bonds, life insurance or retirement accounts. Farmers need to consider their personal risk tolerance, tax considerations and time horizons for their investments.

Reference: Ohio County Journal (Feb. 11, 2021) “Whole Farm Planning”