The late Justice Antonin Scalia already had experience working with “a group of nine” when appointed to the Supreme Court in 1986. He was the father of five sons and four daughters. Being a conservative on matters of law he was often questioned concerning his oldest offspring whose opinions were more liberal than his own. The Justice replied, “In a big family the first child is kind of like the first pancake. If it’s not perfect, that’s okay, there are a lot more coming along.”
When children of SCOTUS fall far from the tree it makes good media copy. When it happens in a family with a business it creates significant planning problems.
Consider three common concerns when only some of a business owner’s offspring choose to follow in the footsteps of their entrepreneurial parent.
Playing percentages in the will.
The most typical dispositive instruction for an estate left to children gives each an equal fraction of the property. This is fine so long as the testator believes that differences regarding the allocation of interest in a particular asset can be resolved without an issue. But when a business owner intends that only certain children are to inherit the business his or her intentions must be expressed in a specific direction that the business go to the share of only intended future owners. Instructions about who should and shouldn’t inherit a business must be exact and unambiguous and, better yet, understood by all prior to death.
The elephant in the room.
This can be a problem if the business accounts for too much of the estate’s value leaving too few non-business assets to non-business children. But there are solutions.
If either or both parents are insurable, life insurance can be used to bring additional value (and liquidity) allowing for a larger and more flexible estate distributed without unintended business ownership by disinterested children. Make sure the purchase of life insurance for estate equalization doesn’t create financial underwriting issues. Also, address whether inheritance tax problems won’t be created or aggravated?
An intra-family buy-sell agreement may cover a multitude of sins. The child who will carry on the business can have the right to purchase any interest transferred to other children. The buying child can own the coverage on the parent to make the purchase. This might also serve to alleviate financial underwriting questions and keep the proceeds out of the estate. If the parent is uninsurable steps should still be taken to arrange an unfunded agreement that would allow for purchase of any scattered interests on terms as manageable as possible to all.
Employing Peter to pay Paul.
Often a child that goes to work in the family business becomes more capable, most valuable and more beneficial to the company as time goes by. He or she accepts more responsibility, contributes more hard work and is involved in more decisions that increasingly contribute to the success and the net worth of the enterprise. The child can make a legitimate argument that at least a part of the company’s value should not be considered in the estate hotchpot that is to be divided equally among other brothers and sisters who did not contribute.
Two common planning techniques that could recognize a participating child’s role in enhancing company value are either an increase of compensation or the adoption of a program of lifetime transfers of interest in the business.
The second is often accomplished by restructuring the business as a family limited liability company with non-voting interests. This allows the parent to maintain control of the business regardless of the percentage of interest transferred during life. Transfers (and their increases in value) are removed from estate tax liability, often with a valuation discount for gift tax purposes.
In the new high-lifetime-exemption tax environment, this is only one example of a common ongoing life insurance need for high-net-worth clients who may not have estate tax issues. Call Tom Virkler for further case discussion at 706-614-3796, or tom@cpsadvancedmarkets.com!
For What It’s Worth: The Guinness record-holder for most pancakes served in eight hours is the IHOP in Santa Monica, CA, which served 25,629 pancakes to 8,543 guests earlier this year. Only the first customer had any complaints!
