May 9th

Ensuring a Smooth Generational Transfer

Transferring the ownership of a family business from one generation to the next can be challenging, particularly in today's world, where the financial values and business objectives of multiple generations may differ. As an advisor, I have witnessed the various difficulties families face while navigating the process of transitioning the family business to the next generation.

By prioritizing communication and seeking professional support, families can navigate the complexities of generational transfer with confidence and cohesion, while creating enduring value.

Understanding Current Complexities of a Family Business

There are natural challenges intrinsic to family business ownership succession planning and transfer. An array of hurdles — such as navigating shifts in federal regulations and economic landscapes, or balancing intricate family dynamics and evolving business management paradigms — stands in the path of each generation involved. Understanding and overcoming these obstacles is pivotal for ensuring the successful passage of the family business legacy.

Sunsetting Estate-Tax Exemption

Some of the most persistent issues family businesses face are a result of congressional actions. I recently attended a meeting of the Family Business Caucus in Washington, D.C., where I had the opportunity to hear family businesses speak to Congress about their issues. The most pressing worry among family business owners was the sunsetting estate-tax exemption in 2025. With this change, the current $13.61 million per person exemption will be reduced to $5 million, aligning with pre-2017 Tax Cuts and Jobs Act levels (adjusted for inflation).

If Congress doesn't agree to extend the higher amount, it could mean significant challenges for family businesses and their estate plans. Many family business owners have their wealth tied to shares in the business, which are not necessarily liquid. For example, if a family member passes and there's no liquidity within their estate other than the ownership of the business, their family will have to identify a way to purchase back the shares so the heirs have the liquidity to pay their estate tax bill.

Recently, I spoke to a family who found themselves in this dire situation following the unexpected passing of a shareholding brother. Without proper transition structures in place, the surviving family business owners were faced with a more than $40 million tax burden, requiring them to sell some of the family's assets to satisfy it. This is just one example of what is at stake.

Planning Ahead

I often see family members who are so hyper-focused on the family business and its success that they forget to focus on the long-term, bigger picture. This approach is successful in real time but potentially hampers the future of the family business and the security of the next generation. Family business owners with this mindset often lack urgency in planning for the future and aren't aware of the potential implications this might have on the family's wealth and the future of their business.

To empower the family to manage the business as needed while ensuring long-term planning is not neglected, I recommend engaging the support of a third-party expert to develop a structure and plan for the business not only 10 years out, but also 30 and maybe even 50 years from now. A specialized advisor can help a family business succeed through their detailed and holistic approach to managing the family's finances as well as matters such as payroll, taxes and real estate assets.

Family Dynamics

Across different generations, there's a natural inclination to see their approach to running the family business as the definitive way forward. The founding generation typically holds steadfast to their vision for the business yet may struggle with relinquishing control to the next generation. Conversely, the second generation may prioritize personal pursuits over business operations, which can create tension with the founding generation. Meanwhile, the third (or sometimes second) generation may seek to carve out their own path within the family business or explore avenues beyond it.

These generational shifts can introduce divergent viewpoints on the business' direction, including debates over bringing in a non-family CEO. While these discussions are healthy and reflective of evolving perspectives, it's crucial to foster an environment where all family members feel heard and respected and tensions don't create divisions. Embracing diverse perspectives ensures that everyone's input is valued, ultimately contributing to the longevity and success of the business beyond the founding generation, as well as the family.

Implementing a Smooth Transition to the Next Generation

Now it's time to unravel the secrets of seamlessly passing the torch to the upcoming generation in a family enterprise.

Implementing a smooth family business transition to the next generation requires an orderly, multi-step process. Skipping any steps can lead to disaster, not only financially but also in terms of family harmony.

Step 1: Lay the Foundation

The first step is laying the foundation for the family office and future transitions. Families must start by creating a family mission statement or family charter that articulates family values, goals and objectives. Outlining clear lines of communication, rules of engagement and methods for conflict resolution is imperative to the success of this effort. For the mission statement to be relevant and enduring, members of all generations must be involved in this stage and allowed to share their thoughts and perspectives.

Step 2: Design the Family Office

Once the mission is set and agreed upon, families must develop a family office structure — a platform all family members can rely on for information about the business, estate plans and legacy plans. It's the centralized location of all family documents and becomes the main source of institutional knowledge that stays intact through multiple generations.

Far too often, I have seen issues arise when the founding generation doesn't spend the time on step one and moves directly to step two. When the founding generation creates an elaborate rule book and family charter that all future generations must live by without their input, the effort is usually met with great resistance, especially from the spouses of the next generation. However, when everyone feels like they are heard and have an opportunity to weigh in, there is a much better chance of achieving buy-in and family cohesion.

Step 3: Align Estate Plans with the Master Plan

The third step in this process is ensuring that each family member's estate plans conform to the master plan. The individual estate plans of each member can have an impact on the wealth of the entire family and enterprise. As such, it is important to develop individual estate plans that align with the mission, rules and architecture of the master plan. The master plan should serve as the family's financial North Star, helping to guide and align all financial decision-making to the stated mission and the family's best interest. Again, this step underscores the importance of step one, as family conflict related to individual estate plan choices is likely without buy-in.

Step 4: Consider Third-Party Support

Family office management and estate planning are serious responsibilities. For families that wish to utilize a single-family office, I encourage them to forecast how their business trajectory could unfold and create a framework for how funds and management should be allocated to future generations.

However, if these steps and efforts feel daunting or there is concern about family alignment on the architecture, business-owning families might consider hiring a multifamily office. A multifamily office can guide families in the collective development of a mission statement and manage the financial architecture to ensure the family maintains harmony while managing business endeavors and leadership transitions from one generation to the next.

When it comes to navigating the transition of a family business to the next generation, achieving flawless continuity is challenging. However, with meticulous preparation, a profound understanding of each stakeholder's perspective and values, and collaboration with a reputable advisor, smooth operation becomes not just a possibility, but a steadfast assurance.


Written by Brian G. Bissell, Senior Vice President, Client Advisor at Whittier Trust. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.



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