It is inevitable in any business that there will come a day when the founder is no longer there. Often in planning for this eventuality, great care is taken in trying to avoid estate taxes, and with good reason.

On the death of the business owner, the family can be presented with a bill from the IRS for half of everything in the owner’s estate. Often these taxes result in the loss of the family business and the serious depletion of family wealth.

By focusing on the financial aspects of succession planning, the more personal issues are sometimes ignored. If this happens, you may keep the business in the family, but you may also lose the family in the process.

Dividing Up the Company

A simple example will help to highlight some of the possible pitfalls:

Tom Jones is the president and founder of DC Polymetrics, a very successful company with 15 employees. The company is the family’s largest asset by far. Tom has a wife, Edna, who is not involved in the business, and two children — Allison, who works in the business, and Jared, who has yet to find his place in life, but definitely does not want to work in the family business.

Tom has never put much thought into a succession plan and hasn’t discussed the issue with his family. He plans to leave the business to Edna when he dies, because she needs the income. When she dies, it will be split evenly between the two children in an effort to be fair. Sounds simple enough, doesn’t it?

There actually could be a number of devastating problems here.

When Tom dies, Edna will own the business, but who will be in charge? Officially it’s Edna, but she doesn’t know anything about running the business.

What if, instead of dying, Tom becomes mentally or physically disabled? Who takes over? Who has to go in front of a judge and have Tom declared incompetent?

How will the business afford to pay Edna a salary and pay a replacement for Tom? Since Edna is not actually doing anything, will her salary still be deductible to the company?

When Edna dies, there is still the same salary problem with the children, plus how fair is it to pay Jared and Allison equally when only Allison does the work? How will this make Allison feel towards Jared?

Since Jared owns half the business, it is available for his creditors or anyone who successfully sues him.

What if Jared decides to try his hand at the business? Who is in charge?

David Luckie (left), president of GEDA, presents the Governor's Existing Industry Award to Paul Mechler (right), president of Marvair.

Company and Family Planning

Setting aside the estate tax situation for a moment, there are a number of issues that could cause significant family discord.

How can you avoid them? It can be summed up in one word — planning.

Transition Planning — Planning must start from the top down. Everything should be initiated by the business owner with all family members and advisors involved. Family values and potential issues should be brought to the surface ahead of time and planned for now.

Control — A delicate balance must be struck on how much control and/or ownership (if any) the founder is willing to give up today to avoid estate taxes and other problems tomorrow.

Equalization — In an effort to be fair to the children in the business and those not in the business, a method for equalizing inheritances is vital.

Continuity — The death of a business owner may result in a significant loss of revenues for the business. This possibility should be planned for.

Asset Protection — Anything you own can be taken from you in a lawsuit or divorce. Careful consideration should be given as to how the business is owned and who owns it.

It is imperative that the business owner assembles a team of advisors knowledgeable in these areas to help guide the family through the process. While planning for the disposition of your business is never pleasant, it certainly beats losing your business, your family, or both.

Tuttle is the managing director of the Legacy Group, a planning organization in Stamford, CT. He can be reached at 203-609-9077 or (e-mail).

Sidebar: Marvair Wins Industry Award

CORDELE, GA — Marvair, a division of Airxcel, Inc., was honored with the Governor’s Existing Industry Award. The award was presented by the Georgia Economic Developers Association (GEDA) at its recent banquet in Atlanta. The award recognizes a business that has made a substantial economic or social contribution to its community.

Marvair moved to Cordele in 1954 and has grown from a small, regional manufacturer to a worldwide supplier of hvac equipment for telecommunication enclosures, schools, and commercial modular structures. Over the past five years, the company has also added a new distribution center and manufacturing building, an engineering facility, and a plant expan-sion. Starting with only a handful of employees, Marvair is now one of the largest employers in Crisp County. The company was also recognized for its participation in community activities and its help to schools, churches, and volunteer organizations. l

Publication date: 06/25/2001