When it comes to teaching family business Rutgers University sees things a little differently from the rest of the world: It considers family business to be more of a psychological discipline than a business skill.
Allen Silk, a Stark & Stark attorney who represents several family businesses, got involved in the program primarily because of that distinction. Rutgers is the only family business forum in the country that comes out of the school of psychology as opposed to the school of business, he says.
The Rutgers Family Business Forum’s next program will be Friday, September 19, at 8:30 a.m. at the East Windsor Ramada. The cost: $75. Call 732-445-7504.
There is a multitude of variations of conflict indigenous to the realm of family business, and as Silk explains, each particular situation is different. But there are unmistakable patterns common to every situation, he says.
Unlike non-family-owned businesses, family businesses are often subject to control issues, whether it’s a parent trying to control their children or siblings engaged in rivalries. And, Silk reports, there are often inter-family jealousies arising over who gets the business when the principal family member dies. Or, the issue of gender can rear its head Å especially when a historically-male-run business’s heir apparent is a woman. And sometimes, Silk adds, priority conflicts arise between married and unmarried children working at the business.
But the fundamental difference between a family and non-family-owned business is the omnipresent end-of-the-day knowledge that the business is going to passed from generation to generation.
Regarding the changes in estate planning, Silk has five words of admonition: Taxpayers Relief Act of 1997. Silk says to pay close attention to three things: The lifetime credit for gift and estate tax purposes (it’s being increased over the next 10 years from $600,000 to $1 million), the provision that increases the tax exclusions for closely-owned business (up from $1 million to $1.3 million), and an increase in the annual tax-free gifting limits.
If it hasn’t already, estate planning should demand the family’s attention now with the revised tax codes. Like many businesses, family businesses included, people have not paid any attention to the planning, says Silk. The death of a family member from an older generation can be a trap for the unwary, he adds. What they find out is that the family-owned business is the major asset owned by the family unit.
The key to offsetting the potentially huge federal estate tax (up to 55 to 60 percent of the estate due soon after the principal’s death) is by optimizing tax credits offered by law. You can’t just let the family business be transferred from one spouse to the other without interposing a credit shelter trust. This will give a business run by two spouses the ability to take advantage of both credits.
For example, if a husband has a $1 million credit and his wife has a $1 million credit and the husband transfers the whole business to her there’s no tax on the first to die. But when the wife subsequently dies as owner of the business, only a $1 million credit remains. But if the husband had put $1 million worth of equity into a credit shelter trust for the wife’s benefit, Silk explains, that $1 million credit could have subsequently earned additional millions in interest. That’s where the major savings is, says Silk. If you don’t do that you do just what the government wants.
But despite the fact that few companies adequately plan for the death of family members, he finds that the new tax law is a wake-up call.
But, he adds, I don’t think the relief is going to be that tremendous although no one should walk away from the increased credit. That’s a lot of money to leave on the table.
Think this stuff sounds intimidating? If it does, your family business might want to consider getting an advisor. David Niemeyer, director of the Rutgers Family Business Forum, notes that the September 19 meeting will cover estate planning and choosing advisors. Niemeyer hints that the task is easier said than done.
As far as advisors are concerned one of the most critical things that any family business does is inviting someone outside of that family business to give them advice, says Niemeyer. Particularly because there has to be not only a level of confidence in the advisor but a level of trust between the family business member, or CEO, and that advisor.
The forum suggests developing a list of interview questions for prospective advisors, to see if they feel comfortable with that person’s experience, credentials, and personality.
But perhaps the most daunting part of this job happens after the advisor is chosen. Says Niemeyer, Let’s say that the advisor becomes a real close friend of the family, and unfortunately that person who is advising the family has not kept up-to-date on current issues and there becomes a concern of the family that to change advisors would damage a relationship with a friend. There’s always a possibility that the personal ties may be strong enough that they negatively affect what should be the advisor’s role.
When in doubt, Niemeyer says, the advisor should bear the responsibility of remaining objective.