How Not To Ruin The Holidays
'Tis the season! As the year winds down we have visions of sugarplums and prepare to make New Year's resolutions...and business-owning families often consider such matters as family meetings, gifts of stock, and bonuses and dividends for family members.
Mixing sensitive compensation and estate planning decisions with the holiday season complicates matters. The discomfort can be so great that important decisions may be deferred for yet another year. We often rue the fact that most family businesses function on a calendar year basis.
As the mother in one business-owning family told us with a sigh: 'I understand the importance of family business planning and communication; I realize this is the best time to get everyone together; but I hate to complicate an already over-busy and over-stressful time with a family meeting. We never seem to get a break from the business!'
With respect for the holidays and the mix of emotions they bring and awareness of the inevitable fiscal year-end, we offer several important seasonal thoughts.
Family Meetings. Pure family time for pure family pleasure is essential for healthy family functioning. Too often the family despairs that whenever everyone gets together; all the talk is about the family business. Prove that idea wrong this year.
During this holiday season, be sure that family time is fun time. Refuse to let the family focus on the business even if the whole family has to get together at another time to discuss the business of the family. Protecting holidays for the family and getting the family together for business matters make for a better family and a better business.
We advocate the development of thoughtful guidelines on such matters as stock gifting, dividends and family bonuses. When guidelines exist, decisions can be made and communicated earlier in the year. In that spirit, we encourage two principles: 'build the nest egg' and 'gift aggressively.' Both are fundamental to long-term family business continuity.
Build the Nest Egg. We believe that providing financial security for the senior generation is perhaps the most important step in succession planning. Unless the parents feels secure, they are very reluctant to pass on ownership, power or control. The successor generation winds up frustrated and feeling entrusted. Emotions escalate.
To avoid this trap, parents must define their 'nest egg' for security and work with their successors to provide necessary funding.
In the ideal case, the seniors have nurtured their nest egg with years of savings. More often, rather than saving outside the business, they reinvest everything into the business' survival and growth. Consequently, the nest egg has to be funded late in life. As a result, the senior generation needs to take larger year-end bonuses. While taking large amounts may seem to weaken the business balance sheet, in reality a stronger business can result because its leaders feel more secure, confident and energetic.
Another way to provide funds for the senior generation is to have the junior generation buy some of their stock. For the younger generation to afford their elders' stock, they must receive larger bonuses. Another approach is to have the business redeem the elders' shares, which usually requires additional bank borrowing. These decisions are too weighty and difficult to be left to year-end.
The starting point of estate planning and the key to family bonuses and dividends is providing the means and schedule for 'building the nest egg.' The next step involves our second year-end financial planning principle.
Gift Aggressively. As one family business owner reported sadly but succinctly, 'The majority owner of my business is Uncle Sam!' It's true. For businesses of moderate value, death taxes still can consume upwards of half of a business's worth!
Despite changes in estate tax law, the death tax still puts the bite on family business continuity. While there are several ways to deal with this problem, we continue to recommend aggressively gifting stock in the family business. We urge you to establish a gifting guideline appropriate to your business and family circumstances and stick with it every year. Remember, each spouse can gift $11,000 of value to as many people as he or she wishes each year. When you develop a specific gifting policy, the event becomes automatic and makes year-end wondering and discussions unnecessary.
If you are among the fortunate ones whose business is increasing in value faster than you give stock away, our advice is even more emphatic. To keep stock appreciation out of your estate, make early use of your unified lifetime exemption, the ability to gift $1,000,000 in value either during life or from your estate without paying taxes. It can even make sense to pay gift taxes to transfer ownership that is appreciating quickly.
Please get the advice of your tax advisors, but we find that paying gift taxes can be one of the best investments a business-owning family can make. Gift taxes cost less than death taxes and early gifts permit more of the company to be passed on by taking advantage of lower valuations than will prevail in the future. Finally, while you can time gifts, you generally can't time your death. (Consequently, you should gift even more aggressively when values are lower.) The wealthiest families we know got that way and stay that way by very aggressive gifting to succeeding generations.
Aggressive gifting, of course, brings us full circle. Parents are reluctant to gift aggressively if they don't feel financially secure personally--hence, the need to build the 'nest egg.'
At year end, many business owners get tense as they consider the troubling decisions of bonuses, dividends and gifts of stock. They organize a lot. The more conscientious of them feel the need to call a family meeting to explain their ultimate determinations. The holidays--a special time for the joy of family--can become compromised by the business of the family's business.
We urge families to break free of year-end family business tension by establishing principles to guide the decision making, communicating those principles, and implementing them at family meetings earlier in the year. Make a New Year's resolution to define the senior generation's nest egg and to plan for its funding. Also resolve to put the best estate planning tools available---including aggressive gifting---to work for you.
Please discuss these ideas with your professional advisors. Make and communicate your decisions earlier next year. Then enjoy the holiday season with your family.
The toughest time to own a family business may be at year-end. Proper planning can help relieve that stress. Have the happiest of holidays and a healthy and prosperous New Year!