• Transitioning A Family Businesss And Estate Planning Tips You Likely Haven't Heard Before

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    November 14, 2018

    Business And Estate Planning Newsletter

    Welcome back to Cunningham Dalman's Business and Estate Planning Newsletter.  We strive to provide you with helpful articles and links to legal issues on topics related to business and estate planning. We hope you find it beneficial! 

    Family Business: How To Transition A Company To Active and Inactive Family Members

    By Haans Mulder

    A common challenge of a family business is how to transition the ownership to both the active family members (i.e. ones who are employed by the business) and the inactive ones (i.e. those who aren't). This is necessary when the family business is such a large percentage of the current generation's net worth that it isn't feasible to set aside non-family business assets to those inactive family members.

    Let me first explain some of the reasons for the challenge. First, the active members may feel they aren't adequately rewarded for their efforts. In other words, if the company grows, that financial benefit will flow equally to the active and inactive family members even though the active family members likely drove the increase in value.  Second, closely held businesses typically don't pay a meaningful dividend because the company wants to accumulate cash to invest later and the active family members are paid for their employment through compensation. This means ownership in a family business for inactive members may have little short term financial benefit. In fact, inactive members may eventually want the company to be sold because it may be the main way they're provided a financial benefit.

    One option to address these dynamics is to restructure the equity of the company to provide for preferred and common ownership. The preferred ownership would receive a certain percentage return each year while the remaining earnings could be distributed to the common ownership or accumulated to further grow the business. Also, the preferred ownership would be allocated to the inactive family members while the common ownership would be assigned to the active members. This would be beneficial to the inactive family members because they'd receive a consistent financial benefit from the company. It would likewise be favorable to the active family members because the company's growth above the percentage return to the preferred ownership would flow to them.   

    If you have questions regarding this structure, feel free to contact me.

    Helpful Estate Planning Tips Your Attorney May Not Have Mentioned

    By Alex Zucco

    If you have worked with an estate planning attorney before, it goes without saying that your primary focus was on the documents themselves - a will, maybe a trust, powers of attorney, etc. And hopefully when you concluded the process and your estate planning documents were signed, you also received some instruction on the next steps for preparing your assets to transfer to your beneficiaries to put the estate plan into full effect. However, I have seen in practice that sometimes this extremely important step does not receive the attention that it deserves.

    Please read on for some helpful estate planning advice  you may have not heard before:

    • Don't Wait To Update Your Beneficiary Designations - Immediately after you finalize your estate planning documents, you should contact your financial advisor, retirement account administrator, insurance agent, bank, and any other person or institution that holds your financial assets. The reason? Making sure that these financial assets have up-to-date (and properly filled out) beneficiary designations. These forms are crucial, whether you have a trust or just a "simple" will, as they will ensure that upon your death, your financial assets transfer directly to either your trust or your individual beneficiaries.
    • Don't Retitle Your Vehicles Into Your Trust - Once the "trust funding" ball starts rolling, it can be tempting for the thorough, planner types to address every single asset. However, please know that vehicles are the one asset that are not usually advisable to transfer to your trust, as doing so may require you to pay a 6% use tax on the value of the vehicle (under the present rule of the Michigan Secretary of State). Instead, the better approach is to rely on the specific provisions under Michigan law that allow upon the owner's death for transfer of motor vehicles with a total combined value of up to $60,000 and watercraft with a total value combined of up to $100,000 to a surviving spouse or heir without the need for probate administration.
    • Consider Designating Particular Items Of Personal Property Ahead Of Time - A lot of clients are quick to ignore their "miscellaneous personal property" (such as family heirlooms, furniture, etc.) because they don't perceive these items to have much monetary value. However, we have often seen that, particularly in contentious families, these items hold significant value to certain family members, and thus become the source of a lot of infighting. The solution to this issue is to either designate the beneficiary of these items directly in the will or trust, or often more conveniently, a separate letter or memorandum referenced by the will or trust that you can change as many times as you want without having to pay your attorney to update your documents.

    Thinking through these items will ultimately result in getting the most benefit and value out of your estate plan.

    Linda Vugteveen, Administrator
    (616) 392-1821

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