Non-Tax Aspects of Estate Planning – Part IV

December 15, 2006 Hull & Hull LLP Uncategorized Tags: , , , 0 Comments

When looking at the myriad of issues and problems that are created with succession planning for a family business, it is often forgotten that the family member who has been charged with (or readily accepted) the job of carrying on the family business is not him or herself particularly happy with the proposed division of the estate.

The question of "fair but not equal" is often a lifelong struggle for those who want to pass on a family business. In some cases, there is simply not enough money to fund a relatively equal division of the estate, as the core assets of the estate are tied up within the family business.

In certain situations, the non-participating family business members are treated in a "fair manner" by being given, for example, the proceeds of an insurance policy as opposed to the family business on death. The child who is charged with running the family business may not see that as being particularly fair. He or she may feel that for him or her to financially succeed, he will have to work in the business for the rest of his life, while the other siblings who are receiving fixed assets simply have to wait for the estate to fall in and they do not have the same lifelong work commitments to fulfill.

On the other hand, things can get particularly complex where one of the children does indeed want to and does receive the shares of the family business. The financial calculation of this gift is often based on complex valuation formulas which accommodate for discounts in the context of the family dynamics. Unfortunately, the valuation issue alone can be both expensive and time consuming. However, if this is the technique from which the division of the estate assets is going to be undertaken, then early intervention into this issue is essential.

For example, some communication within the family about an agreed upon valuation process should begin well in advance of one’s death. If the process can be agreed upon, then arriving at a value of the family business is much simpler. If the process is addressed well in advance of death, then there are fewer surprises to the non-business participating family members.

In our experience, sometimes it is best to leave the distribution formula up to the next generation. Meaning, let the children who are ultimately going to share the asset decide on the formula to be employed upon your death.

We will continue to look at these non-tax estate planning issues in future blogs.

All the best,

Ian & Suzana.

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