What’s a mother (or father) to do?
Their youngest son has worked alongside them in the family business through high school and college. Their other children took different career paths. The parents want to give less time to the business. The son wants to take on more responsibility.
So, should mom and dad transition the management and retain ownership, possibly for income purposes? If they transfer ownership as well, should it be as a gift or should the son buy the business? These are the issues that need to be addressed (with appropriate sensitivity to family dynamics) before recommendations are offered.
Consider this example. Dad started his industrial supply business several years ago. Today the firm has 27 employees, $2.5 million in annual sales and a fair market value of about $1 million. Dad turned 60 recently. Mom relinquished her bookkeeping duties a couple of years ago.
Dad wants to slow down but can’t now due to stiff competition. His youngest son, 30, is anxious for a greater role in the business, but dad isn’t quite ready to turn over the reins.
How does he keep his son interested and in position to take over the business in three to five years? What does dad do for his other two children if he just turns over the business to his youngest? What will mom and dad rely on for income if dad no longer has a part in the business?
A family meeting produces a major conclusion: Dad and mom don’t want to shortchange any of their children regarding their inheritance, especially with regard to dad’s business. Here are some alternatives they all can consider.
With the youngest son recently married and planning to start a family, dad can help with the son’s financial protection by paying for life and disability insurance as a bonus to the son. This is a simple and easy plan to administer and could be an incentive for the son to stay in the business.
If dad turns over the business to his son, the IRS may treat the transfer as a taxable gift. The business probably makes up a major share of dad’s total estate. There may not be an equal value among the other assets to pass on to his other two children.