If ignored, quarrels can jeopardize planning
Whether through outside consultants or in-house experts, law and accounting firms increasingly are incorporating family counseling and mediation as an integral part of family business succession planning. Leaders in the field said taking that step helps to avoid litigious disputes between heirs and clarifies the company’s post-transition leadership.
If family issues are ignored, or if owners fail to plan at all, battles over inherited ownership can not only jeopardize the original owner’s intent but also risk the survival of the business itself, according to experts.
“If two succeeding generations are involved, having 30 owners is not impossible,” said Michael Shimmin, partner at Novato-based accounting firm Ghirardo CPA. It can be left to heirs to determine the future of the business and its assets. “If they are part of a family that has some deep dysfunctional issues, the problem can become volatile. The economic cost of the resulting legal negotiations often ends in a forced sale of the property and the wasting of massive amounts of family wealth.”
While family dynamics have long played a role in succession planning, society has evolved significantly from an era when the eldest son was assumed to inherit the family business, according to Lara Gilman, partner and chair of Farella Braun + Martel’s Family Wealth practice in San Francisco.
In that more intricate landscape, Ms. Gilman and others highlighted the importance of early planning and documentation to preserve the original owner’s intent. With approaches that include dividing a company into controlling and noncontrolling stock, business owners are able to gift a company’s wealth to any number of heirs while isolating management control among true successors, she said.
Yet Ms. Gilman cautioned that enduring family divisions can still derail an otherwise sensible succession plan.
“It’s very hard for a family to get everyone together and going in the same direction,” she said. “Being a business partner is hard enough. But imagine being a business partner with a sibling, when you remember things like when you were 5 and he pulled on your pigtails.”
To help avoid later complications, Ms. Gilman’s firm and others bring stakeholders together early. Mediation that can include a team of accountants and lawyers, as well as outside consultants or in-house staff tasked with smoothing the psychology of the transition.
“We as advisers are sometimes forced to ask some tough questions,” said Ray Pounds, a partner at Petaluma-based accounting firm Pisenti & Brinker. “Pops might have the idea that his son should replace him, but is that what his son wants?”
Mr. Pounds said that some owners have a hard time setting aside longstanding ideas of succession to an immediate heir. Yet today, many advisers encourage a merit-based selection for future controlling owners, whether immediate heirs or otherwise.
Perceptions of favoritism among heirs can be a recipe for litigation, inspiring a greater need for early discussions and mediation, according to Steven Goldberg, partner at Santa Rosa-based law firm Friedemann Goldberg.
To avoid future issues, Mr. Goldberg suggested an independent trustee, including a private fiduciary, bank or trust company, could relieve concerns of favoritism.
“Families that are dysfunctional will find a way to continue to be dysfunctional, regardless of how elegant or well-drafted the plan or business documents are,” he said. “The independent trustee may seem more expensive but would be far less expensive than litigation.”
Whatever the conclusion, firms advocate selection of a successor early to allow greater time to transition any significant customer relationships, according to Mr. Pounds. Beginning a succession plan early also has additional benefits, allowing owners to gradually pass shares of their company while remaining under their annual gift-tax exemption. By dividing voting and nonvoting stock, owners can still maintain control while passing significant value to successors.
In addition, a temporary increase in the lifetime federal gift- and estate-tax exemption has lead to a swell of interest in passing ownership assets. With a $10 million combined exemption between spouses and lower rates that are set to sunset at the end of the year, owners are currently able to pass a large value of those interests at lower expense or even tax-free. [See "Endangered ways to limit gift, estate taxes," Sept. 17.]
In the North Bay, many industries known for family ownership stand to benefit from the increased exemption, according to Mr. Pounds. Industries such as wine and dairy, often described as “land rich, cash poor,” face large tax burdens for beneficiaries in the event that the land asset is passed in a lump sum to heirs.
To limit future conflicts, Mr. Shimmin recommended gifting control to a limited number of trusted family members, avoiding even-numbered groups by seeking one, three or five controllers. Other family members can benefit from nonvoting shares.
“The economics may be evenly shared by all, but control has to be limited, focused and trusted,” he said.
However, not all families have suitable heirs to take on management responsibilities. In those cases, Ms. Gilman said approaches include election of a management committee or hiring outside managers.
“Some business owners make a tough choice and realize that a sale of the business may actually be the best thing for the family,” Mr. Goldberg said. “Family feelings cannot be ignored and tough choices may be necessary. However, most would agree that it is better to make those choices and to communicate them up front than to have expensive litigation later.”
“It’s not an easy thing to do, but it can’t be ignored,” Mr. Pounds said. “Ultimately, they’re going to be looking back on the whole process and whether or not it was successful.”
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