FAMILY BUSINESS: Who will protect your family, business when you're gone?

December 31, 2007

No one is immortal, of course. When you are no longer able to do so, who will preserve your business and protect your family as you do today? There are two interrelated aspects to this simple question: Who will manage the business and who will be trustee of any trusts you may create for your family?

A critical element of family businesssuccession planning is the selection and training of the next generation of managers. Can more than one child serve as the president and CEO of your business when you are gone? Probably not very well. The office of "co-presidents" does not have a good history of success.

It is better to select one new manager who will be in charge when you no longer wish to be or no longer are able to be. What additional training does this person require to have your vision of the overall business? A child may work very well in a sales, finance or production capacity; however, a broader view of the entire enterprise is required for that child to be your successor.

Should you tell the person you have identified as the next manager of your selection? That is a tough question. Some business owners may give a child greater responsibilities and training, in an effort to see how it goes. Your initial selection, based perhaps on emotion more than intellect, may not work out.

There are emotional issues to confront, of course, particularly from the other children who were not chosen to manage the business. Putting off the inevitable, however, does not change the need to plan for your succession. Even if you do not yet tell the anointed child of his or her selection, you need to start planning for the future.

The family finances may be dependent on the success of the family business after you retire or die. What cash flow will be available to your widow if the new manager of the business is not willing to begin a dividend program? Your compensation will stop when you do, of course. Even if the earnings of the business continue after your death, how will your widow get access to those earnings?

If your estate plan creates a trust for the benefit of a surviving spouse and the children, who will serve as the trustee? If that trustee is the new manager of the family business, how will he or she overcome the inherent conflicts of interest in serving as both trustee and manager?

The new manager may believe that the business cannot afford to pay dividends after you die: more marketing and advertising must be done; more compensation must be paid to your successors; and so forth. Nevertheless, this same person (if serving as trustee) has fiduciary obligations to your widow and all the children.

Perhaps you have named a family member to serve as trustee, rather than to name a professional trustee (such as a bank trust department). If that same person is simultaneously the trustee, one of several beneficiaries and the new manager of the business, the conflicts of interest can be considerable.

That is not to suggest that you cannot name a family member/new manager as the trustee. It just takes a carefully thought-out business and estate plan, so that all the interwoven elements can be taken into consideration.

If you decide to name a beneficiary as the trustee and as the new manager of the business, be certain that your estate-planning documents expressly acknowledge the conflict of interest and waive any lia bility which the named person otherwise would encounter.

Great care must be exercised when planning simultaneously for the future management of the family business and for the future economic security of the surviving spouse and children. The family will continue to be economically dependent on the business, as you all are today; however, who have you selected and trained to take over the roles that you play today?



Manterfield, a partner in the law firm Krieg DeVault LLP, assists family businesses with succession planning. The information in this column is not intended to be legal advice.
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