Second Generation Family Business Shareholder Transition Planning

Let’s consider a family business with second generation (G2) family members still working in the business, but realizing they need to start shareholder transition planning to pass the family business to succeeding generations to keep the company family-owned as well as minimize estate taxes. The family members understand we are in a window of opportunity before the lifetime exemption sunsets to a significantly lower amount at the end of 2025. Let’s meet the Campell family owning XYZ, inc.

In the early 1940s, Duncan Campbell started XYZ Inc., a concrete business in eastern Ohio. Duncan’s three children were actively involved in the business, each working in various leadership capacities. With their “boots under the same table” each night, this second generation (G2) personally watched, lived, and understood the sacrifices required to make XYZ successful. At the dinner table, Duncan and his wife (G1) imparted their wisdom, as well as their vision and values, to their children. As G1 aged, they transferred ownership interest in XYZ outright to G2 in equal shares.

Fast forward to today, G2 has grown XYZ from a small, local business to a regional leader in the industry. XYZ is a successful and highly profitable company with some grandchildren (G3) actively involved at different levels of management. Two spouses are also working at the company. However, not all G3 family members want to join XYZ and have chosen different career paths. The family is wealthy, growing, and geographically dispersed, thus no longer do they have “boots under the same table” each night. Now it’s different families with different parental philosophies, including spousal influence, bringing completely different family perspectives.

G2 is ready to retire, plus their advisors are encouraging them to do estate planning, given the continued appreciation of XYZ shares. G2 recognizes the many risks of XYZ shares being included in the estates of individual family members – particularly estate taxes. Their primary concern is that an untimely death—or worse, multiple untimely deaths—could put pressure on XYZ to help meet the estate tax obligation of individual family members who own a highly valuable but illiquid asset within their estate with insufficient liquidity to cover the associated estate taxes.

The family anticipates that the executor of a family member’s estate would turn to XYZ to assist in creating liquidity to meet the tax obligation by redeeming shares from the estate. In addition, G2 realizes that as each generation creates trusts and selects different trustees, current and successor trustees would multiply. These trustees would potentially be more removed from the family and particularly from the family’s mission, vision, and values.

Further, the trustees’ lack of knowledge about XYZ could lead to distractions when the company’s’ managers are called to educate numerous trustees on XYZ’s strategy. More importantly, XYZ’s managers could be in the position of needing to justify the reason the shares should remain in the family trusts, even as a concentrated position. Also, the larger the family becomes, G2 worries that the family’s values, traditions, and overall commitment to the family and XYZ are being weakened.

Over time, the family has worked to keep family stories and the history of XYZ alive through regular family gatherings designed to provide updates on the company’s progress as well as to foster positive family relationships. Productive family decisions can be facilitated by generational groups knowing each other and having the time to build trust. Although it’s clear that the family meetings are helpful and important, G2 also realizes a more formal structure is needed for these events to continue. They also want to expand family activities, such as family trips and retreats, to keep the family connected.

Lastly, many G3 family members have expressed an interest in continuing to be a part of XYZ and few have a desire to divest of their grandfather’s legacy. How can this legacy be supported across generations with some G3 family members working in the company and others not?

Enter a family trust company (FTC). It allows a family to remain involved in, and maintain control over, the family business as shareholders while also supporting both family members and the family business. The formation of an FTC can help families achieve the balance between the present and future by providing a flexible and adaptable structure that allows family participation on the FTC’s Board of Directors and/or committees. This flexibility permits individual family members to decide whether they want to remain actively involved in shareholder decisions in the family business or to choose passive involvement while benefiting from beneficial ownership in the business. And, moreover, it can do so while insulating family advisors and family members from personal fiduciary liability if serving as individual trustees.

Retaining control over the family business through an FTC as trustee of family trusts also benefits families interested in keeping the business privately held across generations. Establishing a Family Business Asset Committee can focus shareholder decisions within a subset of the family and its advisors who are best situated to make well-considered shareholder decisions. An FTC can provide educational opportunities for all family members, including the rising generation, and can offer engagement opportunities for a wider number of family members regardless of whether they are actively involved in the operations of the family business.

While the family no longer has the benefit of “boots under the same table,” it can create a sense of common purpose and intergenerational harmony, and, in essence, have “boots under the same roof.”

_{The information provided is general in nature and is not a testimonial or endorsement by any existing or potential client. No compensation was provided directly or indirectly for use of the information. The information provided is generalized based on hypothetical backgrounds that led to the approach discussed.}