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The Private Company Affair.

While the size of the estates of private company leaders can easily match those of public company CEOs, the heads of family enterprises have a hast of concerns all unto their own, not the least of which is deciding who will run the ship when they're gone.

"Succession planning is the major issue in family businesses; until you have the succession plan in effect, you can't really do the estate planning," says Jeffrey Galant, tax partner at Goodkind Labeton Rodoff & Socharow, who specializes in family-owned companies. "You have to know which children will be in the business, which will run the business." In some cases, he says, the CEO will not want to have the children who aren't involved in the business as stockholders in the company; rather, he or she will prefer to provide for them with some other assets.

But that can get tricky, says Robin Klomparens, chair of the estate planning group for Weintraub, Genshlea & Sproul. "That might create uneven distribution because if you leave one child the business, you also have to leave enough liquidity to pay taxes." To preserve equal distribution of wealth among siblings, "assuming that's your goal," she adds, consider setting up a charitable trust for the child not involved in the business so he or she can gain income now and additional benefits later.

Liquidity is a particularly large issue for private company CEOs, says Galant. "The CEO of a public company, assuming he has stock and stock options, has great liquidity. You sell the stock and pay the estate taxes. Bat for the privately-held business, there's usually no market for the stock. So they're squeezed and they have to do some real estate planning to make sure they don't have to suck up all the liquidity from the business to pay taxes." Techniques such as the family limited partnership, the Grantor Trust Retained Annuity (GRAT), and the sale to a grant or trust are all devices used to freeze the value of a company and take advantage of discounts.

Succession issues grow further complicated when family members share leadership and issues arise over whose child or children will take over the business. "So they have potential conflict down the road unless they work out a plan," says Galant. "This has to be done early because if you sit down when the kids are 35 or 40 and one kid is the winner and one is not, it becomes very difficult to tell that to the father of the loser."

Family-owned corporations certainly see their fair share of feuding, particularly between parents and children. If a child has no interest in the family business - end seems to have no interest in anything else - the bearer of gifts should think carefully about how to provide for the passage of wealth. "Many very wealthy clients of mine are complaining that their children don't have any purpose in life," says Klomparens, who says CEOs should consider conditional inheritance, "something that says you have to work X amount per week at a charitable organization." Conditional inheritance works well, too, for children you have come dangerously close to disinheriting altogether.

Not surprisingly, a good deal of emotional baggage gets lied up with estate planning - and can wind up grinding the process to a hall. "You can draft a will or a stockholder's agreement and they won't sign if and you wonder why and it turns out it has nothing to do with the legal work. It's all these other problems," says Galant. "So you have to deal with the real issues."
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Title Annotation:succession planning
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Geographic Code:1USA
Date:Oct 1, 1999
Previous Article:Life Insurance.
Next Article:Estate Tax Liability.

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