This post was written by The Beringer Group:

In the US, the family business has, since the end of WWII, been one of the great producers of both jobs and wealth.  And yet, if one reads the literature, one knows that most family businesses don’t last beyond two generations.  This can be due to many causes, but one of the most prevalent is the lack of planning to tax-effectively pass the business from one generation to another.

As the senior generation business owner ages, and the next generation prepares to enter the business or, having entered, to assume more responsibility, it is typical for all of the equity and control to be and remain in the hands of the senior generation.  The owner who really wants to keep the business in the family needs to begin thinking about whether equity is an asset or a liability and about whether all that he/she really needs (or wants) is control until such time as the younger generation is ready to assume company leadership.

Owning equity at one’s death is a liability because when the senior generation dies, your “Unwanted Partner” is the IRS and State Departments of Revenue, who are waiting in line to receive their “share” of the business - as much as 50% of its value as they determine it.

In the successful family business, raising the cash necessary to buy out this unwanted partner can be crippling and can often lead to the death of the business and family ownership.

But there are many techniques that, if implemented correctly and timely, can eliminate or reduce the share the Unwanted Partner claims.  Many of these techniques can be implemented in such a way as to reduce the equity ownership of the senior generation without reducing the control they feel they want or need.

Many of these techniques are best used in the context of a Subchapter S corporation or other pass-thru entity, but can also be used in the C corporation context.

Voting and non-voting stock capitalization lets one create a non-controlling asset which carries equity and value with it, without carrying voting control.  Non-voting stock can, for example, be “transferred” via such techniques as gift, sale, GRAT (grantor retained annuity trust), sale to defective grantor trust or a combination of these, depending upon a number of factors including, importantly, the financial capacity of the company.

In many circumstances, the senior generation needs to receive value for a transfer of equity, in order to create a retirement nest egg or to maintain lifestyle, and many of these techniques allow for that.

What is required is a “strategic plan” that considers the family, the needs and desires of the senior generation owners and the next generation, the financial health of the business and even an understanding of where the business fits in its industry now and in the future.

Such a holistic approach requires both a family’s commitment, and a sophisticated and knowledgeable team of advisors who can help take the pieces, complete the puzzle, and keep the Unwanted Partner from tipping the table.

Barry J. Levin

The Beringer Group
201 King of Prussia Road, #220
Radnor, PA 19087

Phone: 610-293-2020
Fax: 610-293-1212
blevin@theberingergroup.com