Tips for Boomers Looking to Hand Down the Family Business


Baby boomers who started their own small business and are ready to hand over the reins should choose their successor with careful thought.

Launching and running a successful business requires a lot of hard work, planning and dedication and these qualities need to be present in the succession process. Consider this: an estimated eight million baby boomer business owners are at or nearing retirement, according to a report, and if they want their business legacy to live on, they need to find the best possible candidate to take over.

Avi Kestenbaum, partner and co-chair of the Trusts & Estates Department at New York law firm Meltzer, Lippe, Goldstein & Breitstone, says only 30% of family businesses successfully pass to the second generation, 12% to the third and 4% to fourth generation. Succession planning is often the most complex part of the estate planning process and without proper planning and execution of a succession plan, there could be trouble ahead for family businesses.

"The three biggest mistakes well-meaning families and estate planners routinely make create more problems than they solve." He says that 85% of the crises faced by family businesses focus around the issue of succession, underlying the need for boomers to take this process serious.

Kestenbaum offers the following tips to create a family business succession plan to make sure the transition from one generation to the next is seamless:

Boomer: What are the three biggest mistakes in estate planning and what are some solutions?

Kestenbaum: The biggest mistake is the failure to understand the difference between probate vs. non-probate assets and the ramifications of not understanding this difference. Probate assets pass under a will. Non-probate assets such as IRAs and life insurance policies pass by beneficiary designation and/or operation of law, such as a joint account holder with rights of survivorship. Another example is a home that might be jointly owned: Not recognizing this important distinction could mean a will that is substantially irrelevant and assets that would pass to someone not intended.

Another large mistake often occurs with tax apportionment clauses. If a state or federal estate tax is due, from which assets are these taxes paid? The will or trust will often have provisions dealing with this. If not, state law governs, but often times there are conflicting provisions and/or not well thought out provisions. For example, two children may receive assets, but one child pays all the estate taxes due on both assets ----and might ultimately receive nothing or much less than the other due to the taxes paid out of his portion. This could also occur if the IRS later asserts a gift or estate tax that wasn’t contemplated and the provisions require all taxes to be paid out of a certain portion of the estate.

Leaving substantial assets outright to beneficiaries, even when they reach certain ages, can be a big mistake. These beneficiaries might later have a creditor problem, divorce, or other financial issues and the assets could be taken away from them. Or they might be financially irresponsible or become lazy by receiving too much at once. Furthermore, they may have their own estate tax issues someday. Instead, let the assets pass in trust for the beneficiaries. The trusts can be drafted very flexibly and even allow the beneficiary to appoint his or her own trustees or serve as co-trustee. This depends on the wishes of the creator of the trust as to how flexible the trust should be.

Boomer: Should your family be involved in business succession discussions?

Kestenbaum: Generally speaking my answer is "absolutely not" even though the textbook answer is "yes". No good generally comes out of this meeting. It usually leads to more discord, jealousies and accusations. As Jerry Seinfeld says, "there is no such thing as fun for the whole family." Parents need to be strong and unwavering about their decisions and make them while they are still vibrant. Also, the decisions must be implemented while the parents are still living so everyone gets used to the business running with the succession plan the parents have drawn up. This way there is a smooth transition upon their death or incapacity. One on one meetings and being sensitive to the children is certainly always recommended, and in rare circumstances, perhaps the entire family meeting might be helpful.

Boomer: How can you integrate a non-family CEO into a family business?

Kestenbaum: If a non-family CEO is going to take over, he or she should be integrated into the business while the boomer owner(s) is still strong, vibrant and involved in the business. It should not be done as a direct insult to their children.

I often recommend a structure similar to a public company, where perhaps no one person has total authority and there are real boards and leadership committees. Sometimes there can even be a company board and a family board. It really depends on the situation. It is worth noting that there is a business model called "self-management" which essentially discards the typical hierarchical business model into more of a team approach, which might be helpful to assure business longevity.

Boomer: Where can one look for professional help with business succession planning?

Kestenbaum: Many estate planning attorneys have experience in this area, but there should be a team approach: an accountant, insurance professional and  banker should all be involved with a “quarterback” from the list taking the lead.

There are outside consultants who also claim to have special expertise in this area, and even a psychologist might be helpful at times. Reading books and articles on the subject is also informative, but this is a complicated area that when done properly, blends tax planning, business acumen, legal structures, psychology and emotional intelligence. In most circumstances, this is very difficult. Keys to success include choosing the right advisor, and the parents being open and not afraid to make difficult decisions.