Estate Planning Must Account for Family Dynamics

An often-overlooked aspect of estate planning is how family relationships and goals affect a family business and related succession planning.  The owners of a family business may reach the point at which they consider retirement or a reduced role in the business.  They may be reluctant to sell to third parties for various reasons, such as a desire to keep the business in the family; however, the younger generation may not have the willingness, interest, or maturity to take the reins.  One option in such a case is for the owners to create a holding company and contribute their interests in the family business to it.  The members of the younger generation can be given managerial powers over the holding company, and outside professional managers can be hired to oversee the day-to-day operations of the business.

This arrangement can offer benefits, depending on family dynamics.  The younger generation gains business experience while under the watchful eye of the older generation.  Cash distributions from the business to the holding company can be used by the younger generation to fund different businesses, which may be created as subsidiaries of the holding company.  This funding of different businesses not only diversifies family investments, but also allows the younger generation to pursue commercial interests that best align with their talents.  At the same time, cash distributions can be limited to ensure that young family members lacking in experience and maturity do not have unfettered access to large sums of money.  The older generation retains ownership of the family business and can provide oversight in various roles, such as consultants.  Ultimately, if the holding company structure does not work as intended, the members of the younger generation have the option of selling their respective interests in the family business after they inherit them.