LEGACY PLAN: Who Should Get the Stock?

by Larry K. Greenwalt, CPA | Chairman of the Board and
Anita Sherman, CPA | Managing Partner

During the past two months we have been discussing the ownership transition process, particularly as it relates to family owned businesses. As previously discussed, transition is a process that should occur over time in accordance with a well thought out, coordinated plan. But what about children who are not involved in the business? This often presents a dilemma that results in inaction-but it needn’t be that way!

Conflicts are inevitable when non-active family members become owners in the family business. Issues can arise related to compensation matters, fair market rental rates and stewardship, resulting in strained family relationships and even lawsuits. Experience has taught us that ownership should not be provided to children or other family members who are not active in the business. There are better options available to allow non-active family members to participate fairly in the inheritance without placing an ongoing burden on those family members who are running the business.

One option is to provide in your will that, in dividing up your estate, children active in the business first be allocated the shares of stock in the business, and the non-active children be allocated the other non-business related assets. Business real estate not owned by the company should be treated similar to the stock. In the event that there are insufficient non-business assets for the non-active children to have equal asset shares, redemption agreements should be put in place with manageable payment terms, in order to balance out the estate share. There should be updated buy-sell/stock repurchase agreements put into place now while you are still in control, to ensure that the siblings will have written agreements to follow in the event of a future disagreement.

An additional factor to plan for is when your spouse survives you. Would it be wise for him/her to continue to have control of the company, and if not, how this would be addressed? We have a lot of experience in dealing with this matter also, and every situation is different. This too can be properly addressed in your wills, and specific buy/sell agreements.

Sound complicated? It is often difficult to recall all of the decisions made related to the various scenarios that can occur, particularly with the passage of time. We recommend drafting a Legacy Plan which outlines what you want to have happen (and which are or will be embodied in the various agreements and wills). Drafting this plan at the beginning of the process results in a roadmap that you and your advisors can follow in ensuring that the proper agreements get put into place. When completed it serves as a communication tool for you to share with your family members, as well as an easy reference tool to review the overall plan.

Tax planning considerations can also factor into the plan. If you would like to review your situation and/or concerns, please give us a call.