Preserving the Foundations of Family and Business Require the Right Tools

“The store was like my grandparent’s house,” said a longtime friend when recalling his childhood visits to his family store in Manhattan  For years, his family’s business was something he considered important, but not essential to his life. However, when the possibility of watching his family’s business disappear came close to becoming a reality, he chose to enter the business.  His intervention proved fortuitous-several years later, the business was more successful than ever.

Many family businesses are not as fortunate when it comes to ownership and management succession.  A recent survey found that nearly half of all family businesses lack a clear succession plan.  Additionally, a third of those with plans have one or more incomplete components which can lead to confusion and conflict over the planning owner’s intent.  This lack of planning threatens not only the existence of the business, but the continued health and closeness of a family.

To avoid such situations, the owners of family businesses must prepare their businesses and families for the eventual transition well before it actually take place.  Consideration must be given to issues of who will own the business and who will manage it.  It is also important to consider the tax implications of transferring a business to members of a younger generation and how to preserve a business’s family ownership structure.  Beyond the actual mechanics of ownership transfer, business owners should also consider how such transfers will affect those not selected to be involved in the management and ownership of the business.  A complete review of the senior family member or members’ estate and financial planning should take place alongside any planning for the business.

The components of a successful succession plan vary depending on the specifics of the family and business involved.  Certain considerations are essential.  First, the plan must lay a groundwork for the transfer of the ownership of the business to the next generation.  Who will own it, when they will take over and how they will pay or not pay for the ownership interests are key questions that must be answered.  Second, the management structure of the business should be determined while the current managers are still in charge.  Preparing the next generation of business managers to take over and illustrating what is expected of them will greatly enhance their chance to succeed.  Finally, businesses should consider using a succession plan as a means to establish a conflict resolution policy and a policy regarding future transfers of ownership interests.

The benefits of preserving a healthy family business are numerous and far outweigh the work that must go into preserving its health.  In financially uncertain times, family-owned businesses provide their owners with stability and protection from outside forces.  Because they are typically not subject to the whims of investors and other outsiders, the business owners are vested with control over their affairs and, being family, they tend to share the same values with one and other.  These shared values greatly reduce the amount of turnover of the management a business can face. Just as important as the benefits that family ownership can bring to a business are the benefits a business can bring to its family owners.  Family-owned businesses become the centers of their families and can serve as a tremendous source of family pride and unity.

As a major component of the world economy, with nearly 70 to 90 percent of the global GDP tied to family owned ventures, the continued health of family businesses is important to all of us all.  For family business owners, the importance is a more personal affair. Proper succession planning allows families to continue to thrive both in the workplace and at home.  Without a solid plan, problems in the business sphere can inevitably seep into the family dynamic.  “It’s difficult sometimes because this is my family,” my friend told me regarding his concerns for the future.  “At the end of the day, I have to have Thanksgiving with these people.”

Please contact for more information about business succession planning.

A Tale Of Two Business Owners

The following is a true story of two businesses.  Two professionals owned their respective businesses and successfully built them into thriving practices.  Each professional decided to bring a partner on board to share the burden and benefit of ownership.  And, unfortunately, each professional died while still engaged while still practicing their respective trades, leaving their business partners and family members to pick up the pieces.

Professional A had entered into a buy-sell agreement with his partner.  The agreement was fully funded by having each partner buy a life insurance policy on the life of the other.  When A passed away, his partner submitted a claim to his life insurance policy.  Three months after A’s death, his partner received the proceeds from the insurance policy, and used them to buy out A’s widow.  The partner had complete ownership of the business and A’s widow received the full value of her husband’s hard work.

Professional B hemmed and hawed about preparing a buy-sell agreement with his partner.  A draft agreement was prepared, but never signed.  No funding mechanism was ever decided upon or implemented.  When B died, his partner decided that it was his hard work that created the value in the practice, not B’s.  B’s widow tried to buy the partner out, but the partner refused.  Lawsuits commenced with neither B’s widow nor the partner receiving the proper value for their hard work.  Three year’s after B’s death, the lawsuit is still not resolved.

The difference between the end results for A and B’s families illustrates how a properly executed and enacted business succession plan can be the difference between finding a way to move on and being mired in a conflict that outlives our relatives.  It is not enough to just have a succession plan for your business, but the plan needs to consider five important issues, namely:

  1. Who will own the business-Business owners must decide if their business will continue by transferring ownership within the company or to parties outside the company.  For family businesses, having children and other relatives who are divided between active and inactive participants in the business can complicate this issue.
  2. Who will manage the business-Many business owners focus solely on the ownership question without considering who will actually manage the business once they are gone.  Failure to name a successor and prepare that successor for the tasks he or she may face is a common reason for a business succession plan to fail.
  3. How will the buyout of the departing owner be paid for-Regardless of whether a funding mechanism exists, the departing owner or his or her estate will be taxed for the value of their business interest.  By preparing in advance for how a buyout will be paid for is crucial to not only maximize the value the departing owner or his or her estate receives, but also to prevent taxes from being paid from non-business related assets.
  4. For family businesses, what about non-owner family members?  In some instances, not every heir of a business owner will inherit a piece of the business he or she built.  This may create jealousy or resentment if the non-owner heirs are not equalized in some form.  Dividing non business assets more favorably to non owner heirs, purchasing life insurance for the benefit of non owner heirs and providing a non ownership income stream from the business are some examples of how to equalize the non owner heirs.
  5. Special issues for professional businesses (professional corporations and professional LLCs)-Under the New York Business Corporation Law, a professional business cannot be owned by individuals not engaged in the specific profession that the business is engaged in (medicine, law, etc.).  The family of a deceased professional will be able to receive a redemption of the deceased professional’s business interests.  However, without a defined valuation clause or buyout provisions, this may provide the family with only a fraction of the true value of their family member’s interest.

The failure of a business owner to plan for their eventual exit from their business, whether for retirement, death or disability, can wreak havoc for their business and family alike.  Planning ahead, as with all forms of planning, provides a business owner with their best chance of allowing both to thrive once they are gone.

Please contact for more information about business succession planning.

A Spring Cleaning Checklist For Your Estate Plan

Spring has begun to blossom and although we had a very mild winter, the improved weather is a welcome change.  And while we are only a few weeks into the new season, thoughts of summer and various travel plans have begun to enter many of our minds.

This time of year is a very common time for reviewing, adjusting and creating estate plans.  With tax season nearly over, getting your estate plan in order is a good next step to ensure all your planning is properly in place for the remainder of the year.

Below is a to-do list for your estate plan.  Some of the items may not be applicable to your specific situation, but all are worth considering.

1. Review your current estate planning documents with your attorney-For a typical individual or family, an estate plan should be reviewed every 3-4 years.  If you have had major life changes or your planning is complicated by health, money or interpersonal issue, you should review your plan even more frequently.

2. Complete your beneficiary designations for “transfer on death” accounts-One of the easiest and cheapest ways to improve your estate plan is to ensure that the beneficiary designations for all “transfer on death” accounts are properly completed.  Certain bank accounts, retirements accounts and life insurance all pass outside of a probate estate as long as the beneficiary designations are executed.  If you fail to designate beneficiaries, these accounts and assets will pass to your estate through the probate process, delaying their transfer.

3. Review all deeds and real estate documents-Real estate that is owned with a right of survivorship will pass outside the probate process.  To ensure a smooth transition, it is important make sure all jointly owned real estate is titled as a tenancy by the entirety property (for married couples) or as joint tenancy property (for non-married couples).

People who own multiple pieces of real estate may wish to consider consolidating their properties in a trust or an entity such as an LLC.  This is especially important if you real estate in multiple states or if you own real estate outside of New York.

4. Meet with your financial planner or insurance agent to discuss your insurance coverage-Like an estate plan, it is crucial that your insurance policies (life, disability and long-term care) are periodically reviewed alongside your trusted advisor.  This allows the advisor to determine if you have sufficient coverage for your current situation and allows the client to determine if they are satisfied with their current policies.

5. Speak with your current or named fiduciaries-In time between a person is named a fiduciary under a will and trust and the time when they actually are asked to serve, the named fiduciary’s relationship with you and their personal circumstances may change.  While most named fiduciaries are close friends or relatives, it is helpful to frequently confirm their willingness and ability to serve.

For those with existing fiduciary relationships, frequent communication about the fiduciary’s administration of an estate or trust is a good way to avoid conflict at a later date.  It also gives the fiduciary the ability to communicate any suggestions or concerns they may have with their current role.

6. File Gift Tax and Fiduciary Income Tax Returns-If you and your spouse have made any large-scale gifts during 2011, it will be necessary to file a gift tax return.  Similarly, nongrantor trusts and estates are required to file fiduciary income tax returns since the income of each will be taxed as a separate entity.

The April 17th filing deadline for personal income tax returns also applies to gift and fiduciary income tax returns.  So while it may be too late to have a return filed before then, it is not too late to file for an extension.

7. Plan your 2012 gifts-With 2012 almost a third over, there remains nine months in which large scale gifts may be made that take advantage of the current $5.12 million gift tax exemption.  On January 1, 2013, absent an intervening action, the exemption drops to $1 million.

For those looking to make more modest gifts, utilizing your annual gift tax exclusion is a great way to benefit your children and reduce the size of your taxable estate.  Individuals may gift $13,000 to as many beneficiaries as they like while married couples can gift up to $26,000 per beneficiary.

8. Plan 2012 charitable gifts-Philanthropically minded individuals should consider the different ways of benefiting charities while also creating tax benefits for themselves.  Individual gifts, charitable annuities, the use of charitable trusts and the creation of a private foundation are all great ways to benefit the causes or organizations that matter most to you.

9. Consider Lifetime Trust Planning-Whether planning for your child’s education, removing your life insurance from your taxable estate or making gifts to your children, lifetime trust planning provides a great mechanism for protecting assets while also providing your children and other relatives with a significant financial benefit.  This is especially true this year while the lifetime gift tax exemption is at an all time high and interest rates are at a historic low.

10. Update your business succession/organization plan-Business owners should be aware of the potential negative consequences of not having a succession plan in place.  Failure to plan for your business, much like failing to create an estate plan, could create unexpected and undesired consequences for your family, business and associates.

A good estate plan requires consistent review and updates to ensure yourwishes are properly enacted.  Before you make your summer plans, make sure that your estate plan is up to date.  It will be one less thing that will keep you from having a great summer.

Please contact for more information about estate planning.

Life Insurance as an Estate Planning Tool

Estate planning is a key component to an individual’s long term life planning.  To ensure the best possible result, an estate plan should be coordinated with other forms of planning such as investment, retirement and tax planning.  In addition, most individuals will include life insurance planning as part of their overall life planning.  For estate planning purposes, life insurance can be a very important and versatile tool.

There are several types of life insurance to choose from.  Term life insurance provides financial protection for a period of years.  It is the most inexpensive form of life insurance and is a good fit for younger people.  However, the premiums increase as a person gets older and unlike other types of life insurance, there is no accumulated cash value to a policy.

Whole life insurance protects an individual for their entire life. In addition, a whole life policy will accumulate cash value over time.  The cash value can be borrowed against and either be repaid or deducted from the death benefit payable to the policy’s beneficiaries.  Whole life insurance is more expensive that term life insurance because it acts as a savings plan as well as a form of protection.  Other types of life insurance include universal life and variable universal life insurance.

The uses of life insurance for estate planning purposes are numerous.  They include:

1) Income Replacement-Regardless of the type of insurance you own, the key component to all insurance policies is the death benefit.  For younger people, having an available resource to replace a loved one’s income stream is the biggest reason to own life insurance.  When purchasing insurance, it is important to determine how large of a policy will be necessary to replace an income stream in the event of an untimely death.

2) Estate Liquidity-Life insurance proceeds can be used to pay funeral expenses, debts, taxes and other expenses incurred at the time of a loved one’s death.  This is especially key for individuals with largely illiquid assets such as real estate and securities.  Without life insurance proceeds, these assets would have to be sold to provide an estate with the necessary cash to pay for these expenses.

3) Business Buy-Sell Planning-Life insurance can provide a family member with the means to purchase an interest in a family business.  Conversely, insurance may also be used by a non-family business partner to purchase a deceased individual’s business interests at the time of their death.

4) Inheritance creation/equalization-Life insurance can be used to create additional wealth to be passed to an individual’s heirs.  It can also be used to equalize inheritances in situations where other estate assets will not be shared equally amongst the individual’s heirs.

5) Estate reduction through gifting-For individuals who have taxable estates, using the annual gift tax exclusion to pay for an insurance policy can decrease the size of their taxable estate.  However, if the individual or the estate owns the insurance policy, the proceeds of the policy will be included in their taxable estate.

As indicated in number 5, if a life insurance policy is owned individually or by an estate, it is a taxable asset for estate tax purposes.  As an alternative, life insurance can be purchased by a trust known as an irrevocable life insurance trust (“ILIT”).  Insurance owned by an ILIT is considered outside of a taxable estate and the proceeds of an ILIT owned life insurance policy pass free of estate tax.  You can also transfer existing policies into an ILIT.  However, if an individual dies within three years of transferring a policy, the proceeds of the policy will be included in their taxable estates.

ILITs can be very helpful in passing wealth estate tax-free, but they require proper care and administration.  Insurance premiums must be paid by the trust directly to the insurance carrier.  The creator of the trust (the settlor) has limited powers regarding the insurance and should not be a trustee or a beneficiary.  The trustee of the trust must also follow all the formalities required by the trust instrument to ensure that the trust assets remain outside the taxable estate.

As you can see, life insurance can provide significant benefits to an individual and his or her heirs.  To ensure that you maximize those benefits, it is best to consult with both an estate planning attorney and an insurance professional to collectively determine the best possible plan for your specific needs.

Please contact for more information about estate planning with life insurance.

Finding Success Through Business Succession Planning

During a recent meeting, the topic of business succession planning was brought up by one of my colleagues.  He mentioned that he recently oversaw the transition of a family business from the third generation of a family to the fourth generation.  Given the poor odds that a business will successfully transition from the first generation to a second, I found this to be very impressive.

65% of family businesses fail to survive the transition from the first generation to the second and 90% fail to survive the transition from the second to the third.  Fortunately, family businesses can increase their odds significantly by preparing a comprehensive succession plan.  A succession plan lays out how the business will be owned and operated once the senior family member or members leave the business.

There are several key questions that a succession plan must answer.  Among them:

1)    Who will own the business?-One of the primary goals of succession planning is to preserve a family business within the family and not require a sale to outsiders.  Beyond this, the original owner must decide if all family members will own the company or only certain family members who are involved in the business will become owners.  Each choice has its own set of problems and challenges that must be addressed.

2)    How will the business be owned?-If the original owner decides to transfer the business to a large group of new owners, they may wish to consider using a trust or another entity such as an LLC to own the business interests.  This can provide both tax and asset protection benefits to the new owners and also allow the current owners to ease the owners into their new responsibilities.

3)    Who will manage the business?-In many family businesses, the original owner will have controlled the business completely for many years and may be hesitant to name a successor.  Nevertheless, picking a proper successor and training them before they take over the business are essential parts of administering a successful succession plan.

4)    How will conflicts be handled? –When a single person controls a business, having a conflict policy is unnecessary.  Once the ownership and management expand, a conflict policy allows both the original owner and his or her successors to prevent conflicts from growing beyond internal disputes.  In businesses without conflict policies, it is not uncommon for disgruntled owners to bring legal action against the business and its owners for failing to protect the interests of the new owners.

5)    How will the original owner be compensated for his interests? –It is common for the original owner’s interest in their company to be their primary asset.  If the original owner retires or wishes to leave the business, he or she will rely on that interest to pay for their living expenses for the remainder of their lifetime.  A succession plan should include a mechanism by which the original owner can be compensated for his or her ownership interests.

Transferring a business to family members is often the goal of the original owner, but in some instances, it is either not desired or not possible.  In these situations, the original owner may instead sell the business for either a lump sum payment or a fixed series of payments.  In these situations, it is important for the original owner to coordinate where the proceeds of the sale will go and how they will be held.  Regardless of how a business is transitioned, it is essential that the business owner coordinate their succession planning with their estate planning to ensure that their assets and family members are properly protected.

A family business lasting four generations is a rarity, but it does not need to be an impossibility.  As with all planning, starting early and working consistently with your advisors will yield the best results for you, your family and your business.

Please contact for more information about business succession planning.