Starting a family business - any business, actually - requires
dedication, determination and skill. Years of hard work and struggle can
often help create profitable businesses.
Those family members who started at the beginning usually appreciate
what they've created and, thus, save and preserve their wealth. While
they can use wealth transfers to reduce their tax liability, many family
business owners also want their children and grandchildren to know the
value of a dollar.
Poor Little Rich Kids?
Many family business owners face a harsh reality. Their ambition and
dreams led them to create lucrative businesses out of virtually nothing.
But now that they have money, they fear that wealth transfers will spoil
their children and ultimately hurt the business they spent their lives
building.
How can family business owners transfer wealth to the next generation
and also instill their values? Unfortunately, one correct answer does
not exist. But several tax-planning strategies can help you preserve
your wealth while restricting your children's access to the money.
Create Custodial Accounts
You could put money for your young children into custodial accounts.
This is perhaps the most basic strategy, because children gain access to
such accounts at ages 18 or 21, depending on state law. And, once they
have access to the funds, your children can spend the money any way they
want. This means you don't want the account to grow too large or to rely
on your children adopting your strict work and financial ethics before
they get the money.
Establish Trusts
Flexibility makes trusts a popular wealth-transfer tool for family
business owners. To be effective for gifting, trusts are generally
irrevocable-this means you can't amend the trust after you create it.
But trusts don't have to be entirely unchangeable. In limited
circumstances, you can provide flexibility through powers of appointment
and other techniques. You can give money or other property to a trust
for the benefit of children, grandchildren or multiple generations.
Trusts can also provide for a spouse.
Trusts can also help shield assets from unwanted "guests."
Creating a trust can help you segregate family - derived assets from
your children's assets and keep creditors and even divorced spouses from
accessing trusts to hold S corporation stock if needed.
Fashion an FLP
Establishing a family limited partnership (FLP) can prevent your
heirs from squandering assets. Why? Because they don't control the
assets held in the partnership. You can transfer a variety of assets to
an FLP and become the general controlling partner. As general partner,
you can then give as much as 99% of the partnership interests to
children, grandchildren or other heirs. The heirs become limited
partners and have no control over the partnership's management or
assets.
Also you don't have to worry about limited partners' liability
affecting the assets. And partnership interests you give to heirs aren't
transferable without your consent.
