 | IN THIS
ISSUE |
|
|
|
Act Now To Be Included In The 2008 Guide To Charitable Giving
Each year, Trusts & Estates publishes a special guide on the
current state of charitable giving. If you're a charity, philanthropic
advisory firm or insurance or annuity company, don't miss this
opportunity to reach advisors to the affluent for an entire year. For
more information, contact Adam Strominger at adam.strominger@penton.com
|
FEATURE STORY
|
Business Owners' Blind
Spot
New study finds they’re
not attending to their businesses’ futures — even though so much is
at stake
By David T. Leibell and Daniel L. Daniels, partners in the
Stamford, Conn. office of Wiggin and Dana LLP
It seems that F. Scott Fitzgerald was wrong. According to a new
study, “Protecting the Family Fortune,” the very rich are not all
that different from the rest of us — at least when it comes to estate
planning. They also avoid it, because making or implementing plans means
coping with the unpleasantness of death, incapacity and taxes.
“Protecting the Family Fortune,” issued June 11, is the first study
of its kind dealing with ultra high-net-worth family business owners. It
surveyed 242 second- and third-generation ultra-high-net-worth business
owners based in the United States (49 percent), Europe (35 percent) and
the Far East (16 percent). The study was sponsored by U.S. Trust, Bank
of America Private Wealth Management and conducted in the third quarter
of 2007 by Campden Media and Prince & Associates, Inc.
The study's objectives were to examine the success of family-run
businesses in transitioning from one generation to the next and to
uncover any wealth planning issues that may have been left unaddressed.
The criteria for participation were: (1) all participants were senior
officers of the company with a seat on the firm’s board of directors,
and a personal equity share of the company of 10 percent or greater; (2)
all owners had a personal net worth of $5 million outside the stake in
the business; and (3) all businesses had values in excess of $300
million, with a mean value approaching $730 million and one family
owning at least 60 percent of the business.
You'd think that these would be precisely the kind of people who'd have
effective estate plans. All had successfully moved control of the family
business beyond the first generation to the second generation (75
percent of participants) or even the third generation (25 percent of
participants). Seventy-eight percent expected the family to maintain
control of the business for the foreseeable future. And all had
sufficient assets outside the business so they shouldn't have to depend
on the business' cash flow.
Yet, the study found, more than 60 percent had not implemented an
effective succession plan. Particularly weak was planning for estate
tax mitigation and asset protection.
The results of this study are consistent with the findings in two recent
studies on smaller family businesses – “Making a Difference: The
PricewaterhouseCoopers Family Business Survey 2007/08” and the Mass
Mutual/Kennesaw State University/Family Firm Institute's “2007
American Family Business Survey.”
In other words, there are now three studies proving what advisors
generally observe: Business owners are not doing adequate estate and
succession planning.
(Article continues below advertisement.)
Back to Top ^
Now Available: Becoming A Rainmaker, the new book from
Matt Oechsli of the Oechsli Institute
Only a very few financial professionals who target the affluent are
bringing in 10 or more new affluent relationships each year. This book
shares the Mindset, Activities and Skills of the Rainmakers who
consistently achieve this level of success.
To order, click
here.
|
(Article continues here.)
What’s Their Focus?
An interesting aspect of the “Protecting the Family Fortune” study
that was not present in either the PricewaterhouseCoopers or Mass Mutual
studies, is the fact that the participating ultra high-net-worth family
businesses were segmented into two behavioral groups identified as
“family-focused” and “business-focused” family businesses.
Sixty-two percent of the participants were categorized as
family-focused. These people place family first, using the business as
a mechanism to address family concerns. They primarily view the
business as a source for wealth creation in service of the family.
The remaining 38 percent were defined as business-focused. These people
find the needs and wants of family members to be less meaningful when
making decisions that will affect the business. This segment
prioritizes business decisions above family decisions.
Perhaps not surprisingly, the study found that the median value of
business-focused businesses tended to be higher than that of
family-focused businesses ($694 million versus $499 million).
Are They Making Plans? Carrying Them Out?
When it comes to succession planning, 76 percent of the participants
have some form of succession plan in place, which is consistent with the
fact that 78 percent would like to keep the business in the family for
the next generation. Unfortunately, most of those plans are collecting
dust. Only 38 percent of participants actually are implementing their
succession plans.
In addition, most of the succession plans focus on management/ownership
succession; only 27 percent deal with wealth transfer tax issues. This
is startling, considering that 93.4 percent report wanting to minimize
their tax bill on the transfer of the family business.
They should, because a lack of planning to mitigate taxes can place a
huge financial burden on both heirs and the business. That's sad,
because business owners who focus on tax mitigation can achieve great
success using advanced estate-planning strategies such as estate freezes
and discounts or even relatively simple techniques like buying
sufficient life insurance outside the estate to pay any estate tax due.
On top of failing to plan properly for the business succession, the
majority of participants did not have up-to-date personal estate plans.
In fact, 22 percent had no personal estate plan at all.
Asset protection was an area of particular concern for participants.
Although 90 percent of business owners are “very” or “extremely
concerned” about protecting their family’s wealth, 73 percent do not
have asset protection plans. When questioned, 67 percent report that
they lack a plan because they have not been provided the proper guidance
to develop one.
Why are these extremely wealthy business owners in such bad shape with
their succession, estate and asset protection planning?
(Article continues below ad.)
Back to Top ^
Presenting The 2008 Wealth Management Resource Guide
For more than 40 years, attorneys, bank trust officers, financial
planners and investment consultants have relied on the Trusts &
Estates Wealth Management Resource Guide as the industry's only
one-stop source of trust institutions and related products and services.
To order your copy click
here
|
(Article continues here.)
The Fault, Dear Brutus
We all know the lore of family business owners: They are unwilling to
give up control and that is why they do not plan effectively.
But the reality is not so simple. The fault lies as much with the
business owners' advisors as with the business owners.
Some businesses have outgrown their existing advisors.
Even the best advisors may not be able to handle all aspects of the
succession plan, but because of insecurity about losing what may be
their biggest client, they are unwilling to bring in specialists.
Often, too, there's no clear quarterback among advisors for family
businesses. The wealthy business owner works with an accountant, a bank
or financial advisor, an estate-planning lawyer and sometimes a family
business consultant or organizational psychologist. Unfortunately,
these advisors may be working at cross-purposes with no one advisor
coordinating the effort. The result is often that we see a busy,
business owner getting inconsistent advice from a variety of
advisors.
It’s no wonder the vast majority of succession plans are not
implemented.
We need a better way. Hopefully, studies like “Protecting the Family
Fortune” will begin the dialogue among advisors and with business
owners.
Back to Top ^
|
|
|
