This is a pretty amazing story about a family business and you might be surprised at how often I run across this situation. I am working with the mayor of a major city on a business roundtable workshop. So I am talking to a lot of small and medium size business owners right now about this roundtable and asking them what sort of issues they want to talk about. A business owner from North Carolina, let’s call him John, told me this story last week about his father’s business.
John’s father spent many hard years building his business and did well. The family business provided a nice lifestyle. John’s father was able to purchase the building where he worked and he also invested in a few rental income properties over the years. John and his three siblings all went to college which Mom and Dad were able to pay for. No student loans, nice!
But what John’s parents did not do so well was estate and asset protection planning. John works in the family business and his siblings do not. And one of his siblings is not so responsible – has an addiction problem that has led to a spotty lifestyle. The storm that John is dealing with now is that his parents passed all of their assets in equal shares directly to the four kids. This included cash, stocks and the rentals. And the ownership of the business is in a state of mayhem. Since John has been working at the business he has a majority of the ownership, but his three siblings have meaningful ownership in the business too.
It’s a mess right now. John’s brother with the addiction problems wants only cash and is demanding a sale of all hard assets for cash. John is struggling with the fact that his siblings have big ownership in the company but never worked there. How do you value John’s time and effort into the business? One of the other siblings does not want to sell the rentals. This is an ugly scenario and I feel for John. The kids are at odds over how to deal with everything and relationships may be broken forever. It didn’t have to be this way.
I asked our founder and asset protection expert Harry Barth what could have been done to avoid this situation and here are his thoughts.
The parents could have set up irrevocable asset protection trusts while they were still alive and in a good mental state. Instead of leaving assets directly to the four kids in equal shares, they could have set up trusts for each of the kids and distributed assets directly to the asset protection trusts. These are not the parents’ trusts, but irrevocable trusts set up for the kids. There are several distinct advantages of doing this. First, these asset protection trusts protect the assets from the future potential creditors of the children. This is especially beneficial for the child with addiction problems because he has more potential liability due to his lifestyle. Second, these asset protection trusts can ensure that assets are passed to the next generation instead of a surviving spouse who may remarry. This protects the intent of the original owners of the assets – that the grandchildren are involved. Third, there is divorce protection. Assets passed in this way are separate property of the beneficiary and cannot be changed to community property in a marriage. This prevents an ex-spouse from penetrating the trust. Lastly, if structured properly there can be some estate tax benefits because the assets would not be counted as part of the beneficiary’s estate for tax purposes – Harry Barth
Here at BarthCalderon, we are passionate about helping families to “pull it all together” when it comes to their planning. It is human nature to kick planning to the curb. But then people get hurt and hard earned assets are destroyed. It’s so great when we are helping families because the conversations can be rewarding and thoughtful and really good outcomes can be a reality.
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