A family business can impose unique estate planning challenges. Assets like cash and stocks can be easily divided among multiple heirs. But a business is an ongoing concern, and not all family members may be part of the company. Ultimately, a business owner’s estate planning must weigh the needs of the company against the interests of other family members.
Let’s say you and your spouse own a restaurant. Your respective estate plans state that in the event of one spouse’s death, the other spouse will continue to operate the business as sole owner. But what happens after you both die?
To further complicate things, let’s say you and your spouse have three children. One child currently works in the business, handling day-to-day operations. Another child helps out occasionally but is not a full-time employee. The third child lives out-of-state and has nothing to do with the business.
It might seem unfair to you to leave the restaurant to all three children equally when only one child participates in the business full-time. But then you think, it’s also unfair to leave the restaurant-the biggest asset in your estate-to one child, shortchanging your other two children on their inheritance. One solution might be to give the business to the one child but leave the building and surrounding property to all three children equally.
Even if you decide all three children are entitled to an equal share of the restaurant, there’s always the possibility that the children who aren’t involved in the day-to-day operations will turn around and sell their share. This leaves the child in charge with the option of buying out the siblings-which might be prohibitively expensive-or allowing majority control to pass to an outsider, something you presumably wanted to avoid by leaving the business to your children in the first place.
Succession Planning On the Gridiron
You must also consider that no business operates in a vacuum. There may be tax, regulatory and contractual obstacles to consider when planning for a change of ownership. Consider one of the most lucrative types of “family” businesses-professional sports franchises. In 2008, when longtime St. Louis (formerly Los Angeles) Rams owner Georgia Frontiere died, the team passed to her two children. Faced with an enormous federal estate tax bill-the team’s value was believed to be over $900 million-and a lack of interest in running the team long-term, they eventually sold the Rams to a minority partner. In contrast, when Oakland (formerly Los Angeles) Raiders owner Al Davis died in 2011, his son Mark assumed control and announced the team would remain in the family.
One thing Mark Davis had going for him was that his mother, Carole Davis, is still alive. Any interest in the Raiders passing from Al Davis to his widow is not subject to federal estate tax. Mark Davis could continue running the business while his mother remained owner on paper.
A third scenario played out in 1997, when Washington Redskins owner Jack Kent Cooke died. Rather than leave the team to his wife or son, Cooke avoided federal estate tax by leaving the Redskins to a charitable foundation he established. The foundation then sold the team and used the proceeds to fund its work.
One problem with Cooke’s plan was that the National Football League had the right to reject any potential buyer of the Redskins. All NFL franchises sign a contract limiting the ability of owners to transfer their teams outside of their immediate family. The NFL rejected the initial buyer selected by the Cooke foundation, and it was more than two years before a sale was approved.
The NFL may be an unusual example, but many types of businesses are subject to regulatory or contractual obligations that must be considered as part of any estate or succession planning. Don’t assume your children or heirs will simply step in to run your business after you’re gone. Speak with an experienced San Diego estate planning attorney today about the best way to provide for your business and your family.