Leaving your legacy: 10 considerations in passing your estate along to the next generation


By Kathleen Safi

Through solution-oriented succession and estate planning, the legacy of a family business can last for generations to come.

Only about a third of family businesses make it to the second generation. This is not because of tax or financial reasons, but a failure to plan and communicate with the next generation of would-be owners.

“Business owners are often very good at what they do, but they’re not very good at planning for the future,” said William A. Snyder, managing partner at Snyder & Snyder, P.A., located in south Florida. Most think of estate and succession planning as being as straightforward as having the proper paperwork filed away and bank accounts in order, but this narrow perspective can lead to dysfunction in the business down the line.

“People need to understand that there are emotional decisions being made. Succession planning is not only about facts and figures, but about human beings,” Snyder said.

The core decisions of a family-business’ succession and estate plan are emotional ones. Sibling rivalries, perceived parental favoritism, rocky marriages, varying degrees of children’s work ethic and passion are all elements that come into play when making a succession plan. An inability to address challenging family dynamics brings many succession plans to a halt, but successful plans take into account the emotional situation of the business owners and find logical solutions. The best solutions come through an open and frank discussion of the family’s business goals, guided by a team of professional planners. “In solution-orientated planning, the families themselves are the experts,” Snyder said.

Tragically, many aren’t motivated to begin a succession and estate plan until a major negative event occurs: the death of a parent, friend or close business associate.

Failure of the head of the family business to take the time to develop proper succession planning can lead to catastrophic consequences; upon his or her death, the business may be forced to sell in order to pay estate taxes.

“The founder’s life work then vanishes, and the family legacy disappears,” Snyder wrote in his book, Preserving the Legacy of a Family Owned Business. Even when a business’ holdings are too small to qualify for the taxation threshold of $5.45 million for an individual or $10.9 million for a married couple, failure to properly plan can lead to family squabbles and probate court, again putting the business in jeopardy.

“Don’t leave succession planning until something happens to mom or dad,” Snyder said. Instead, begin now, and involve the whole family in the conversation.

“When we do succession planning we want to take into account the considered feelings, goals and ideas of the entire family,” Snyder said. “The more inclusive we can be, the better the solution.”

Snyder refers to this approach as “No Empty Chairs,” and often goes to such lengths as hosting a structured family retreat with the goal of discussing and deciding the family’s estate plan as a group. It is important that the first-generation owners are comfortable with the plan, but when mom and dad are gone, the children have to be in agreement if the business is to be in that rare 33 percent of businesses that are passed on successfully.

Basic questions such as: What do you think about the future of the business? Would you like to be involved? Who’s going to own it? Who is going to control it? should be addressed as a family in the beginning stages of succession planning.

Once family discussions begin in earnest, it may become apparent that some members have no interest in operating the family business in the future. A solution-oriented planning approach searches for logical answers to these considerations.

Strive to identify what family members have a genuine passion for the business, and ensure equalizing assets will be received by those who don’t wish to be involved. It is better to arrive at a peaceful exit strategy for dispassionate family members than to have individuals lacking the necessary passion or talents involved in running the business.

“I’m amazed at how poor the record keeping is in family businesses,” Snyder said. When everything is in the family, some best practices are too often overlooked or completely forgotten. “Take inventory of your documents, and make sure you have the basics in place,” Snyder said.

At minimum a will, a living will, power of attorney, a trust and shareholder agreements should be put in writing and shared with an estate planning professional. These documents will form the foundation of the estate and succession plans and will help ensure a smooth transition to the next generation.

Solution-oriented planning is, by necessity, a team approach. “It involves not only an estate planning attorney, but also an accountant, a financial planner, a business succession planner, a life insurance agent, trust officers and charitable planned giving officers,” Snyder wrote. These professionals will be involved at various stages of a comprehensive and integrated succession and estate plan. If you do not already have a team of experts on hand, seek out referrals from a well-connected and recognized professional in the community.

“Many business owners get frozen by fear. They feel they can’t do anything toward their estate planning because they have dysfunction in their family,” Snyder said. Fear of a child’s possible divorce or hesitation to trust a substance-abusing child with control of the business can cause parents to ignore planning altogether. With a solution-oriented planning mindset, family dysfunction can be dealt with through protective trusts. A child’s inheritance can be protected from spouses, creditors or bad decision-making through a life insurance policy paid out into a protective trust.

An estate plan should analyze the total estate and potential taxes and have a plan in place to minimize and pay any estate tax. One creative planning approach involves value shifting by gifting assets. “Start to transfer ownership of the family business early on so children and grandchildren become owners at an early stage. As the appreciation of the business grows and becomes more valuable, the growth itself will not be subject to the estate tax because ownership was transferred early on,” Snyder said.

Once you establish what the estate tax is going to be, make sure the business has enough liquidity to pay. There may be enough cash existing in stocks, bonds and other assets, but if not, purchasing life insurance through an irrevocable life insurance trust is a common solution.

Make sure all other family-related legal documents are in alignment with the family’s succession and estate plan. Check wills and trusts, and create or modify any shareholder agreement to prohibit the transfer of shares outside of the family. Prenuptial and postnuptial agreements should be established so that the a family member waves their interest in any of the shares of the family business. These steps prevent outsiders from gaining ownership or control.

In solution-oriented planning, the ownership is often separate from control. “You could have all the children owning the business with one being the president and CEO,” Snyder said. Recognize the successor and start to train that person to control the business.

Successful family-owned hotels focus on five factors to secure a smooth transition to the next generation, according to Paul Breslin, managing director at Horwath HTL: Passion, talent, means, a business plan and a strong team.

First and foremost is passion, “What we find are the successors who have the passion and the desire, those are the ones who have the fortitude and make it work,” Breslin said. Second is talent. Most are trained by their parents, but forward-thinking parents will send their children off to other businesses to learn. “Encourage them to go and work for other companies, or work for other family members in different types of hotels,” he said. Children also have to have the means to be financially secure without their parent’s assistance. “Often this comes from the parents with a slow earning of ownership, but they have to be financially responsible and capable,” Breslin said. Second-generation owners need to develop a comprehensive, modernized business plan that considers all elements from revenue to cost management and human resources.

And lastly, “the second generation needs to develop its own team: a good lawyer, a good accountant, a good consultant. They have to build some resources so they aren’t alone in the challenges they face,” Breslin said.    ■

The Essentials
Documents to include in your estate planning

  1. Last will and testament
  2. Trust documents
  3. Life insurance policies
  4. Durable power of attorney
  5. Living will
  6. Health care surrogate
  7. Business operating agreements/shareholder agreements
  8. Tangible personal property list (designates which beneficiaries receive sentimental items such as jewelry, art, family heirlooms, etc.)
  9. eState planning (electronic access such as email, financial institution and online passwords)

FAMILY FIRST: The family table as the first classroom

Dina Patel, female director at large, Western Division for AAHOA, and owner of the Scottish Inn and Suites in Houston, Texas, has a passion for the hotel business that was cultivated and nurtured by her late father. Patel’s passion for the family business started at a very young age. “It’s in my blood,” Patel said. The family table was her first classroom. “When we were in India, my parents would sit together and write in a notebook what they spent and what they earned. I was always next to them as a child wondering what it was they were writing down,” Patel said.

A few years after the family moved to America, Patel’s father purchased a hotel in San Antonio. Patel remembers as a ninth-grader in high school assisting her parents with everything from bookkeeping to credit card processing. “Here the memory came up of all those expenses I was doing in India with my parents. So I would relate that same concept – Dad you’re making money, and to run this place you’re going to have expenses. Some are going to be the same, your constant, some will be your variables,” Patel said.

The young Patel worked alongside her parents as the family learned the hotel business together. When Patel opened her own hotel in Houston, her parents came back to guide her through the same paperwork she had helped them with years earlier. Patel continues the tradition of involving her children in the business. Her son puts his math skills to use through real-world application; he helps his father stock the vending machines and count the earnings.

“When you share and your kids see what you do, one day they will form their own passion, whether it is for hotels or something else,” Patel said.


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