Jerry was a successful businessman. He’d built an impressive empire in the manufacturing industry with multiple production locations, an army of sales representatives, and had successfully navigated the economic challenges of 2008. In his late 70s, Jerry had begun radically reworking his business structure and estate plan with the goal of dividing ownership of his empire between his children, but consolidating control upon his death to his chosen successors, an unrelated key employee and one child.
Within a few years of Jerry’s passing in 2012, the family fighting was in full force. Jerry’s wife, who didn’t know all the details in the estate plan, was furious that certain assets did not go to her. Children were angry about the division of control and ownership, both of business and non-business assets. And, though Jerry had transferred management from himself, his dilution of ownership didn’t include any continuity planning. There was no direction for the company or the family in the event of any incapacitation, death, or retirement of the business active child or key employee.
Finally, the estate plan, created in consideration of 2007 laws and taxes, was never updated to adapt to the changing environment, family concerns, or owner goals. In fact, in an effort to circumvent issues that Jerry had with his plan over the years, he began changing beneficiaries on certain accounts without proper consent forms from the existing heirs. This only added to family tensions when he passed away and people started contesting these changes.
What could have been done differently to help Jerry accomplish his goals of transferring a financial legacy, keeping his thriving empire intact, and avoiding a family meltdown? As an Exit Planner, there are a few things I’d discuss with Jerry that you may also want to review with your advisor team.
- Consider making your successor managers the successor owners. It is a noble goal to keep a family business in the family. But making non-business active children or spouses owners reduces the potential benefit for those who pour sweat and blood into the company. It also creates a fiduciary responsibility for the controlling owners to consider the best interests of minority shareholders. Jerry never answered to others when the company paid for a luxury car; should his successors have to answer to other shareholders about their choices?
- Consider the risk! Owning a company and running that company involve more risk than other possible choices of investments. Do your non-active children want to rely on the business savvy of others? Are they comfortable with the significant business risk they face as non-controlling owners? Would they rather inherit other assets that they can control as they wish?
- Keep everyone informed. Jerry’s family members were hurt and angry by the surprises in the estate and business plan. Any decision to give different assets of different amounts to different heirs is taken much better when that decision is explained. For example, if Jerry had left his company to one child and the non-family employee, he could have explained all of the reasons listed above. He could have given significant non-business assets to other children and his wife. This type of “estate equalization plan” often helps to keep the business healthy while simultaneously communicating care for other non-business active heirs.
- Consider the next transfer. Since Jerry wanted his family to benefit from his business empire, it would have been helpful to consider how his wealth transfer might impact the options available to his heirs. Jerry’s plan made any sale, by any party, nearly impossible. The controlling owners are unable to sell at all until the shares reach Jerry’s grandchildren. How, then, will the company incentivize future managers? How will the current owner-executives retire? These problems can be overcome, but needn’t exist in the first place.
- Update, update, update. An exit plan and estate plan should be regularly reviewed with your advisor team. Laws change, people change, and goals change. Jerry’s original plan boxed him in and left him little legal ability to adapt as he realized changes needed to occur.
- Finally, make sure your advisor team has the right members. Jerry tried to coordinate every piece on his own, using only an attorney and a CPA. His investment advisor looked only at non-business assets, and his advisor team rarely spoke. Consider using an Exit Planner to lead your team and ensure advisors are working together to accomplish your goals.
About the Author
Just after college, Austin experienced profound loss with the early and unexpected death of his father. The positive impact of financial planning for his family eventually led him to pursue a career in financial service, and he joined Wealth Advisory Group in 2013. Austin received his bachelor’s degree from the University of Evansville, summa cum laude and has obtained the Retirement Income Certified Professional® designation from The American College. He is a member of the BEI Network of Exit Planning Professionals™ and is a Certified Exit Planner™.
Austin’s practice specializes in risk mitigation and wealth planning for business owners and medical professionals. His team provides expert wealth management, personal planning, and business transition planning for physicians, executives, and entrepreneurs.
Austin Bransgrove is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Park Avenue Securities LLC (PAS) is an indirect, wholly-owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a registered broker-dealer offering investment products, as well as a registered investment adviser offering financial planning and investment advisory services. PAS is a member of FINRA and SIPC. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Please consult your tax, legal, or accounting professional regarding your individual circumstances. Wealth Advisory Group LLC is not a registered investment advisor. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. CA License #0L00236