Legacy and Ledger: Estate Planning and The Family Business

It’s estimated that there are over 32 million family owned businesses in the United States, and collectively, these businesses annually generate over $7.7 trillion in GDP.  Question – and it’s a big one: how many family owned businesses have solid succession plans? Statistically the answer boils down to “not nearly enough,” especially when considering the stakes. Read on for insights on transferring the know-how, values, and wealth of family owned businesses across generations. 

Beyond The Balance Sheet: Business Succession

While a handful of family owned businesses are well known giants (Barrons tells the fascinating Walmart story), most family businesses are not household names. Many do have deep niches. Consider Avedis Zildjian Company, which makes cymbals, and has been operating throughout fifteen generations, running from Massachusetts since 1928. The stories behind family owned businesses are fascinating, and collectively pack a major punch, as illustrated by a round up of a statistics from The Conway Center for Family Business, including these:

• Family businesses account for 54 percent of U.S. gross domestic product, generate 59 percent of the country’s employment, and account for 83.3 million jobs.
• The 32.4 million family businesses in the United States generate $7.7 trillion in GDP.
• Family-owned businesses are the backbone of the American economy. Studies have shown about 35 percent of Fortune 500 companies are family-controlled and represent the full spectrum of American companies from small business to major corporations.
• The greatest part of America’s wealth lies with family-owned businesses. According to the US Census Bureau, family firms comprise 90 percent of all business enterprises in North America.

Given the dollars, know-how, values and livelihoods invested in family businesses, careful succession planning is essential, though it proves to be quite challenging. As the Center for Family Business has found, “family businesses face big issues”:

• It is estimated that 40.3 percent of family business owners expect to retire, creating a significant transition of ownership in the US. Less than half of those expecting to retire in five years have selected a successor.
• 72 percent of owners want the business to stay in the family, yet only 34 percent have a robust succession plan in place.
• Indeed, some estimate that 85 percent of the crises that family businesses face are related to succession issues.

To help family businesses pave the road forward, and prevent the conflicts and strains that can take a real toll absent thoughtful planning, attorneys at Wilson & Wilson recommend integrating business succession strategies into comprehensive estate plans. Specifically, according to Wilson & Wilson, a proper estate plan for a family business protects individuals and the business as it:

• Clarifies Leadership Roles: Explicitly defines who takes control to prevent power struggles.
• Preserves Business Value: mitigates tax burdens and operational disruptions during the transition.
• Protects Family Wealth: Upholds fairness among heirs, whether they are involved in the business or not.
• Ensures Continuity: Provides a roadmap for operations if the owner becomes incapacitated or passes away unexpectedly.

Though all families should have a thoughtful estate plan, anchored by a trust and or a will, those who own a business need to be extra diligent about coordinating plans for the family estate and business. Here are some of the specific pointers attorneys at Wilson & Wilson provide for syncing up estate and business plans:

• A robust estate plan works in tandem with business succession documents to formalize…roles long before a transition occurs. This involves more than just naming a new CEO; it requires a legal structure that defines decision-making power. Through the use of trusts or specific provisions in your will, you can designate voting rights and management control separate from financial ownership.

• …Establish a clear timeline for the transfer of ownership and control. This might involve a gradual gifting strategy, where ownership interests are transferred to the successor over several years to minimize estate taxes. Alternatively, it might set specific triggers for leadership transfer, such as the founder reaching a certain age or the successor achieving specific professional milestones.

• Trusts: Placing business interests into a trust can avoid probate, ensuring privacy and a faster transition of control compared to a public will process.

Ensuring these documents speak the same language is vital for a seamless transition.

Communicate Intentions Along With Decisions

While formalizing a business succession and estate plan within the family requires decisiveness,  it is also wise to document the intentions behind the ultimate decisions. Indeed, when it comes to family harmony, both estate planning and financial experts underscore that most post-death conflicts revolve around unspoken assumptions and expectations. As Philip Galanes has observed in The New York Times, it’s especially key for adult children to understand the rationale behind estate plans, when a decision may be perceived as unusual or unfair: “To children — even adult children — gifts from parents are often received as symbols of love. And that’s why transparency is important here: to ensure that even if your bequests…vary in amount, none of the children misinterpret your gifts as statements of greater or lesser love.” 

Another aspect of estate planning that helps ensure arrangements ultimately proceed smoothly, is the careful selection of the fiduciary. When a will anchors an estate plan, this designee is usually referred to as the executor; when a trust is involved, the fiduciary is referred to as a trustee. In both cases, the chosen fiduciary has a legal responsibility to the estate and its beneficiaries. Given these significant responsibilities, a type of bond, referred to as a fiduciary bond or an estate bond, is often required. Essentially, estate bonds serve as a guarantee that duties will be carried out in accordance with the law and in the best interests of the estate and its beneficiaries. As a leading national provider of estate, and all kinds of fiduciary bonds, Colonial Surety Company makes it easy and speedy to obtain them. Simply: get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.

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