Passing the family business to the next generation

Succeeding in small business

July 22, 1991|By Jane Applegate | Jane Applegate,Los Angeles Times Syndicate

Approaching age 65 and concerned for their family's future, Florence and Hank Billing began figuring out how to pass along their family business and personal assets to their five children.

Of the five -- four daughters and one son -- only their son, Kurt, was interested in running the family's two Southampton, N.Y., clothing stores.

Kurt, who was selling software to retail stores in Seattle, solved half the problem by opting to return home. In May, he bought Billing's Lingerie on Main Street. The lingerie shop is not far from the large-size and maternity wear store his parents own on Hill Street.

Kurt Billing's purchase of the lingerie store fit nicely into a detailed estate plan recently completed by a team of family advisers. With help from an insurance consultant and an attorney, the Billing family set up a family trust and the parents purchased "second-to-die" insurance policies, which pay off only when the second spouse dies.

"Our main objective was to reduce the inheritance taxes for our children," Florence Billing said. "It took about two or three months to accomplish the paperwork, but it's all been taken care of now."

Unfortunately, families who take the time to create a succession and estate plan are in the minority in this country. Most family businesses don't make it to the third generation because the entrepreneurial founder refuses to methodically plan for the future.

"Founders don't trust anybody," said Ernest Doud, a family business consultant in Glendale, Calif. "They believe, 'Nobody is as qualified as I am to run this business.' "

The founder's children, either working in or outside of the family business, are often reluctant to bring up the subject of succession because they don't want to upset their parents, Doud said.

Yet without a clear succession plan, you are courting disaster.

So how do you create a succession plan? It is often best to retain family business specialists rather than rely on your regular attorney or accountant. State and federal tax laws affecting family businesses are so complex, it takes special skills to properly and legally set up a plan.

A good succession plan makes both financial and emotional sense. Every succession plan begins with three things:

1. A management succession plan that makes clear who you want to manage the business when you are gone.

2. An ownership succession plan that outlines who will own the company and control its finances.

3. An overall estate plan that meshes with the first two plans and protects and ultimately distributes your personal assets.

Second-to-die insurance policies, which insure both spouses but pay benefits only when the second spouse dies, are becoming a very popular option for families in business. In most cases, the benefits are used to pay the inheritance taxes or other expenses.

"These policies carry substantially cheaper premiums and under current estate tax laws you don't need the money until the second person dies," said James Wilson, the Syosset, N.Y., insurance consultant who helped the Billing family create an estate plan.

Making sure you buy enough of the right kind of life insurance to cover inheritance taxes is key to a successful plan. It is also important to make sure the benefit is paid to the right entity, usually the family trust rather than an individual, Wilson said.

"You don't have to be worth $100 million to have a problem with estate planning," Wilson said. "The reality is, if you are worth $2 million, you have a problem."

Leon Danco, who has been counseling family business owners since the late 1950s, said he is encouraged by the number of families finally dealing openly with sticky succession planning issues.

"There is an increased awareness among founders that they are responsible for the future of their business," said Danco, who runs the Center for Family Business in Cleveland.

"The estate plan is the fuel for the dream," he said. "And the family-owned business is the epitome of the American dream."

Successful planning tips

1. Do you have a formal plan for the distribution of your business if you die or are incapacitated?

2. Have you chosen a successor and are the succession arrangements clear?

3. Does your succession plan take into account all tax considerations? Can your business handle the tax obligations?

4. Have you set up a buy-sell agreement with your successor so the business can change hands smoothly?

5. Does the plan protect your key employees and other workers if you die? Are their pensions safe? Will they remain with the new owner?

6. Are all the financial elements of your plan coordinated to provide the maximum benefits?

7. Are your attorney, your accountant and your insurance adviser working together as a team?

8. If you have chosen one of your children to succeed you, does the family know who it is? Do you provide for any money for other family members?

9. Does your bank have a copy of your plan? Do they have faith in the successor you have chosen?

L 10. Have you updated your plan in light of any new tax laws?

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