Letter of the Law

by James F. McLeod

For the owner of a closely held business, an estate plan that does not take into account all of the business and family needs may result in disaster.

Consider a family consisting of a husband, wife and four children, all of whom are adults. Only one of the children is involved in the family business. All of the stock is owned by the parents. The family's wealth consists almost exclusively of the family business and the family home.

A typical living trust estate plan will result in financial disaster for our theoretical family. Issues which need to be considered (but usually are not) include the following:

1. The income needs of the surviving spouse.

2. The ability of the child actively involved in the business to successfully manage that business.

3. How the business will be continued beyond the lifetime of the surviving spouse.

When the parent who is the primary manager of the family business dies, that parent's salary dies with him or her. The surviving spouse's income will be severely depressed unless plans have been made to provide replacement income.

One source of replacement income is dividends. A dividend related to the surviving spouse's need for income rather than the corporation's ability to pay could result in damage or destruction of the corporation.

If the child working in the business is not currently equipped to fully manage the business, the estate plan could result in severe depreciation of family assets.

How long is that child to be permitted to try to run the business? How much will the business decline in value during that interim period? In the hands of an inefficient or untrained manager, can the business survive?

The child in the business is required to manage the business for the benefit of the surviving spouse and the other children. If the child in the business is a successful manager, the death of the surviving spouse may only mean he loses the business because the other siblings jointly elect to sell it.

At the very best, the child who is asked to manage the business knows that his or her success will only result in even higher demands upon the business by his or her siblings.

The owner of a family business must consider all of the business and family needs and issues.

If your estate plan does not now meet this test, then you should begin the process anew and develop a plan that incorporates all of the business and family needs.

(James F. McLeod is a practicing attorney with the Springfield law firm of Miller & Sanford. Information and opinions expressed in the "Letter of the Law" column should not be construed as legal advice. For counseling on specific legal situations, please consult an attorney.)

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