Case Study: What To Expect From A Lawyer - selling a small business to a family member and inheritance for other members - Brief Article

Meeting with a lawyer, Jay, who is a single parent, made it clear that while he enjoys a business relationship with only one of his two children, he wants to have both share equally in his estate. Jay wishes to pass the ownership of JJ's Auto Body to Jason through a combination of gifting and the sale of stock in the company over the next several years.

Because there will be some gifting and the sale price will be less than fair market value, Jay wants to be sure that his daughter, Julie, receives an inheritance equivalent to Jason's. Jay does have a couple of life-insurance policies, and their combined face value matches the difference between the reduced sale price of stock to Jason and its fair market value plus the value of the stock to be gifted.

"I think it's a pretty simple transaction," says Jay, "but I get this proposal. It's six pages long and speaks about a couple of trust documents. I think I need to hire another lawyer just to explain the proposal."

Jay believes the amount he will pass on to his children totals a few hundred thousand dollars, and it seems crazy to him to spend thousands of dollars on a lawyer to implement his wishes.

"Do I keep shopping for a lawyer?" asks Jay "What can I reasonably expect?"

Get An Appraisal

Like many business owners, Jay is probably underestimating the true value of his business, if not his entire estate. Obtaining a realistic, independent appraisal of JJ's Auto Body now will reduce the likelihood of future disputes between Jason and Julie over the value of the business, and it may pre-empt a much less favorable calculation imposed by the Internal Revenue Service. Discounts for illiquidity, minority interest, and other issues associated with valuing the gifts and sales of stock to Jason will then be anchored by a defensible valuation.

Likewise, should Jay die before completing the transfer to Jason, Jay's executor will have the documentation in place to support reasonable discounts on the remaining stock.

Transferring a family business to the next generation is never simple. This is particularly true in situations involving children both inside and outside the business.

If Jay has sufficient assets outside the business, he should consider giving Julie nonbusiness assets equal in value to the company stock he plans to give Jason. Some of the liquidity provided by the life insurance can be applied to correct any imbalances between what Jason and Julie receive.

In deciding what's fair, however, Jay must also weigh the value of Jason's contribution to the business for six years and possibly adjust his planning to reflect that value.

A comprehensive estate plan may include wills, trusts, agreements of sale, appraisals, and various other documents--all tied together and reflecting the specific wishes of the business owner and the family.

A competent attorney should have the skill necessary to assemble all the documents required and--at least equally as important--should be capable of explaining, to the satisfaction of the owner, the purpose and context of every document prepared.

Ask Questions

Jay, you don't need another lawyer-you need a coach. I'll bet that your lawyer can be your coach.

The transaction is simple. But its implementation requires an analysis of several key questions and the documentation of a series of mechanisms to make the transaction work. You, Jason, and Julie are involved in a process that each of you must understand. Without such understanding, the transaction will be stalled.

Some of the questions that you will need to deal with include: What is the fair market value of the stock? How deep is the discount of the stock gift? Do you acknowledge Jason's contribution to the company? Does Julie understand that Jason's "equal share" will provide him with a salary in excess of the income provided by her "equal share" of insurance proceeds?

What if you need to borrow on the insurance policy? Will there be an adjustment if you don't complete the stock gifts? What if the value of the company changes dramatically? Who owns the insurance policies and names the beneficiaries?

You can reasonably expect your lawyer/coach to identify simple techniques that will help you, Jason, and Julie handle each of these issues.

You can also reasonably expect that your lawyer will break out each of these issues, analyze each, and coach you, Jason, and Julie to a joint resolution of each.