FORESIGHT NEWSLETTER: WINTER 2010

There’s an old saying about the wisdom of not mixing business and pleasure. But in a family business, keeping them separate is impossible.

Relationships are complicated, but from a business and financial point of view, they can be simplified with good planning.

BEFORE MARRIAGE

All marriages start out full of hope, but a fair percentage of them just don’t make it. A prenuptial agreement can alleviate division-of-asset problems before they occur by defining and protecting each spouse’s property.

In the case of a business, a prenuptial agreement would generally specify that whatever part of the business is owned by the family member remains with him or her in the event of divorce. It may also waive the spouse’s right to inherit a business interest, or dictate that the interest goes directly to the children rather than the spouse.

Many family businesses now require a prenuptial agreement as family members marry or remarry. Written into the company bylaws or policies, this requirement becomes a business imperative rather than a personal preference. And as awkward as it may seem in the midst of a romance, if family members and their fiancés know early on that a prenuptial agreement is simply part of the bargain, it is less likely to be an issue.

DURING MARRIAGE

Written policies can also make a big difference regarding family employment. Do spouses and children automatically get jobs in the family firm? Are there requirements for education, career paths and salary? What about firing family members?

By setting early and clear expectations, family members know exactly what to expect relative to their employment. Most advisors agree that running the business like a business,  not like a family support system, is the best way to keep roles and responsibilities clearly defined.

From a purely financial point of view, families working together offer good tax planning opportunities. For example, income-splitting techniques can help families share wealth and reduce the tax burden. Also, a lifetime capital gains exemption of $750,000 is available to Qualifying Small Business Corporations (QSBCs). This exemption provides tax savings on the sale of the business, whether during the owner’s lifetime or upon death, and it applies on a per-person basis. In other words, the more family members who own the business, the more possible tax-free proceeds from the sale.

Trusts also offer good tax options. In a family trust, parents can retain control over business assets while sharing ownership and growth in value with spouses and the next generation.

ESTATE PLANNING

Wills are important estate planning tools for business owners. Certain assets are subject to probate and others are not. But if one asset in a will is subject to probate, all of the assets in the will are then subject to probate.

To alleviate this problem, one current trend is to prepare two wills. The primary will contains all the assets subject to probate, such as real estate and securities. The secondary will contains all of the assets not subject to probate, such as shares of privately held companies and shareholder loans. The secondary will protects the business from probate interference.

These are just a few of the strategies that can keep family businesses and marriages on the right track. Individual strategies depend on the business owner’s goals, but planning ahead is key. If you would like to discuss these family business strategies further, please contact our firm.

Documents Every Business Owner Needs

• Shareholder agreement
• Prenuptial agreement (if appropriate)
• Will
• Healthcare power of attorney
• Insurance policies