Your advisers are urging you to start shifting stock to the next generation to take advantage of planning techniques that are available to you while you’re alive, but are unavailable at your death. Your business is chugging away vigorously in its 45th year. It’s growing and your children are entering one by one. You foresee significant future growth opportunities. Now is the time to give stock to the children before the share value rises.

Can you merely grab the stock certificates and start assigning them? Unfortunately, nothing is that simple. There are numerous factors that can throw you a curve. Here are some thoughts to ponder with just a sampling of creative ways to deal with the issues:

Retirement financial needs

You must arrange your affairs to provide for your and your spouse’s financial support when you retire. Ideally, you should accomplish this feat by building wealth outside the business so that you transfer all of the stock to your heirs during your lifetime. Building that financial base may mean that you should sell, rather than give, some stock to the children. They can finance the purchase from future business income, and you can stockpile the proceeds for the future.


You probably want to retain voting control until you are 100 percent confident in your successors’ business savvy and your financial security. However, retaining control need not mean that you can only transfer 49 percent of the stock to the children. Consider a recapitalization of the corporation. Turn virtually all the stock into non-voting stock, with just a few shares remaining as voting. That will allow you to transfer virtually all the equity, while retaining only the small percentage that represents voting control.

Uncertain maturity and involvement

You might resist transferring any stock until your children get old enough to demonstrate that they can cooperate as owners and handle the responsibility appropriately. You also may decide to give stock only to those working in the business. That will tempt you to delay your estate planning until they’re 30 or 40 years old and you’ve lost many of the tax law’s opportunities to reduce your estate tax. Rather than delay, go ahead and transfer stock now. But, be sure to have a buy-sell agreement in place to create the ability to buy out stock from any children you ultimately determine to be inappropriate owners. You also could consider making gifts in trust to delay your younger heirs’ receipt of shares.

Unborn children

If you make stock gifts to your two children each year and then a third bouncing baby turns up in the future, the later-born baby starts out behind the eight ball. He’ll own less stock than his siblings simply because he happened to be the last to come on the scene. Of course, you can equalize this inequality by transferring extra shares to the late arrival. Alternatively, you could avoid the problem from the start by making gifts into a single trust that benefits all your current and future born children. That trust will divide equally among your children some time after your childbearing years.

Second and later generation family firms face an additional issue. Suppose that you and your sister each inherited 50 percent of the stock from your parents. You have five children and your sister has only one. In the normal course of affairs, your children each will wind up owning 10 percent (one-fifth of your 50 percent), while your sister’s child will own 50 percent. Your children may see a real inequity here, especially if they work in the business while their cousin does not. Your parents might have altered this scheme if they had made equal gifts of stock directly to their grandchildren, rather than or in addition to gifts to you and your sister.

There’s no easy, fair answer to the vagaries of ownership caused by varying gift strategies and family sizes. However, there are a couple of points to keep in mind. First, parents must realize that they cannot forever treat their children equally from a wealth or stock ownership standpoint. Their different skills, objectives, spending patterns and simple good luck will make them different shortly after you try to equalize them. It’s a fact of life and the longer you try to force equality, the harder it will be for them to accept inequality when the reality hits.

Second, it is important for the family to realize that ownership is not a birthright or entitlement that somehow ensures that each family member will own the “right” amount of stock. Furthermore, ownership and employment need not be synonymous. You can own stock in General Motors without working there. Having said that, General Motors’ management deserves fair compensation for their services to the company, but not the right to own all its stock.

As the family grows, stock ownership may be spread among an increasing number of people. At some point, no identifiable family line has control. Family line jealousies and desires for board representation diminish. The business becomes more like a quasi-public company. The management learns to operate with openness similar to that practiced by their public counterparts. These businesses, which typically are in the fourth or later generation of family ownership, have made an important transition. They have adopted and practiced policies that reduce family frictions, provide for the involvement of a board of independent directors, and better separate family issues from business operations.

If the family members believe that they have rights to demand employment or cash from the company, and if the company is not large enough to satisfy those demands and still grow, the company is doomed. At that point, either the business should be sold or a small group of family members should buy out the interests of other members. Pruning dissenters and other unwilling shareholders from the ranks can rejuvenate the family and business, so that the process can start anew.

It’s a big mistake to delay your estate plans in the hope that you’ll gain certainty about family members’ involvement, abilities, accommodation and desires. Situations will change. Before you know it, your estate tax problems may become unmanageable. Uncertainty about the future need not stymie good planning. Through the use of trusts and shareholder agreements, combined with open communication and ongoing education, you can foster relationships that can adapt to changing circumstances.

Reprinted with permission from Family Business Answer Book: Arthur Andersen Tackles 101 of Your Toughest Challenges, by Barbara Buchholz, Margaret Crane and Ross Nager. Copyright 1999, Arthur Andersen LLP. Prentice-Hall,Paramus NJ.