Estate Planning and Family Owned Businesses

Posted By, Ken Smith

Written By, Byron Moore

The greatest part of America's wealth lies with family-owned businesses. Family businesses are responsible for 78 percent of new jobs created. Yet according to the University of Vermont Family Business Initiative, only 12 percent of family businesses will still be viable into the third generation, with 3 percent of all family businesses operating at fourth-generation level and beyond.

If you think about the way most "tax-only" estate planning is done, the focus could be summarized as The Four Ds of traditional estate planning:

1. Divide.

Slice the estate into as many pieces as possible, so as to maximize gift and estate transfer techniques. If your only goal is to avoid taxes, this makes some sense. If you have a goal of keeping a family or a business together, this approach loses some of its appeal.

2. Defer.

Through complex trusts and generational skipping techniques, defer wealth as far into the future as possible. This avoids taxes today. It also ignores the need to teach the next generation how to use the wealth they are going to one day inherit.

3. Dump.

At some point in time, the money gets dropped on the doorstep of the next generation. What careful planning did to avoid taxes, careless planning fails to avoid — the wealth eroding effects of immaturity and a lack of wisdom by inheritors.

4. Dissipate.

Too often, inherited wealth is greeted with an "I've won the lottery!" mentality. Untrained in the true stewardship of wealth, the downstream, untrained next generation(s) fritter away what should have been a sustainable source of family wealth for generations.

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