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Pass
Down Your Wealth Responsibly |
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
doesn’t 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 the trust principal. You can
also structure 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.
Be Charitable
Many family business owners feel that providing significant
assets to a charity is the best way to set an example for their
heirs. You can transfer a relatively small amount to your children
on death, while leaving the bulk of your wealth to charity.
You can accomplish this charitable giving through a family foundation,
a charitable remainder trust or an outright gift. If you involve
your children in decision making early on, this can be a rewarding
and character-building experience for the entire family.
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