Multi-Generational Planning . . . In Reverse

mgarner  -  Aug 13, 2011  -  Comments Off on Multi-Generational Planning . . . In Reverse

Generally we think of multi-generational planning as moving from parent to child to grandchild, and so on.  Recently a trend has developed where savvy children are encouraging, and even funding, their parents and grandparents to plan or update their estate plans.

Children are often concerned about protecting their inheritance from a parent’s second or third spouse.  Some want additional protections from divorce or lawsuits in their own lives.  Others want particular heirlooms or other family legacies to stay in the family.

Many times people just don’t want to think about a time when they will be gone, and so they avoid doing any planning at all.  Surveys generally show that over 50% of the population fails to plan for what happens after their death.  Now, I see adult children trying to prevent problems by getting their parents to do the planning, in some cases paying for the plan themselves.

I think there is some justification in this, as it is the children that will primarily benefit from the planning.  They can avoid the time, costs and expense of probate.  They avoid the years of fights with siblings.  They benefit from well-crafted asset protection.

One item of particular sensitivity is the transfer of a business from one generation to the next.  Often that transfer takes place over years as value and control change hands.  Failure to plan the transfer of a business to the next generation can cause a series of problems.  Businesses can lose significant value (80% or more) when the owner is suddenly disabled or dies.  This decrease in value due to sudden disruption hits professionals, such as accountants, financial planners, medical professionals, and attorneys particularly hard because clients are often tied to a particular person and it takes time to transfer their trust and confidence to another professional.

When there are multiple beneficiaries who will inherit a business, often causes conflicts.  These conflicts are heightened when some of the beneficiaries are involved in the business and others are not.  Issues such as a fair valuation of the business, use of business revenue (as dividends or to grow the business), control and interpersonal differences – difficult to resolve in isolation – become amplified by grief and other emotions that accompany tragedy.

Even casual attempts at planning can cause problems.  For example, Bob’s son asked me to consult with him and his dad.  Bob (the father) owned a business that was worth about $2 million dollars.  Bob also owned a building with a net worth of about $4 million.  The business was located in, and used the building to run the business from.  Bob’s son was involved in the business but Bob’s other two children were not.  The answer of how to divide Bob’s estate seemed simple and so Bob’s trust gave the business to his son who was working in it and the building to the other children.

When we analyzed the situation, it was revealed that the business was not paying anything close to fair market rent (about 20% of fair market rent).  This created a conflict and a fairness issue.  If the two children were to raise the building’s rent fair market value then the business would become only barely profitable and the business’ true value would be significantly less than $2 million.  If the rent was not raised the other two children would not receive fair value on their inheritance and their actual inheritance would be worth considerably less.

We were able to present several solutions to Bob and his family and resolved the conflicts in Bob’s original plan.  In addition, with the true value of the business revealed Bob and his son were able to make changes to the business that increased both its profitability and the value of the building.

Thanks to his son’s actions, Bob and his family were able to avoid facing a problem at the worst possible time.

By acting before a crisis arises and seeking the expertise of trusted advisors you can mitigate or prevent problems for your family and yourself.  The key is to do the planning before a situation develops.

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