Wealth Transfer Planning for Baby Boomers

By Karl Bareither, CLU

Much has been written about the many effects on our culture of the so-called "baby boom" generation. The baby boomers, generally individuals born between 1945 and 1965, are the single largest segment of America's population. As such, they have influenced our culture in many ways as they aged. From rock and roll, through the hippy culture, to the "greed decade" of the eighties and the soon-to-be-realized retirement frenzy, the "pig in the python," as the bulge in the population chart is often called, is simply too large a phenomenon to ignore. The aging of the baby boomers will affect wealth transfer planning in a big way as well.

Here's why.

According to one recent survey, thirty-nine percent of family-owned businesses expect to experience a change in leadership due to retirement or semi-retirement in the next five years. As time passes, this number will increase as more and more baby boomers reach retirement age each year. The problem is that few businesses are prepared to manage this transition.

A Gallup pole reveals that:

Seventy-two percent of family-owned businesses do not have a business continuation plan.

Forty-seven percent have done no estate planning.

Of family business CEOs due to retire within five years, 55 percent have not yet chosen a successor.

In spite of those facts, eighty-one percent of family business owners say they want the business to remain in the family. Clearly, planning does not reflect expectations. The question to ask is, "Why not?"

There are many reasons why individuals with substantial wealth hesitate to plan for its eventual disposition. Reluctance to face one's own mortality is certainly one of them. Procrastination is another. However, family dynamics, and the resulting tensions, are often the real cause. Nowhere is this more striking than in those situations where most of the wealth resides in the family-owned business.

Most estate planning and wealth transfer challenges center around issues of "fairness" and "equal treatment" for all family members. In large estates that consist mostly of cash and investments, this problem is relatively easily solved. Simply dividing the value of the estate equally among beneficiaries often accomplishes the estate owner's goals. When a business is involved, however, things become more difficult.

The problems are two-fold. First, a business is generally non-liquid, meaning it is not easily divided among multiple beneficiaries. The business interest is usually not marketable and seldom has other value such as dividend payments. To many beneficiaries in this situation, it is a classic good-news, bad news scenario. The good news is you are now a business owner, the bad news is the business does not generate any income for you and it is not marketable. So much for fair treatment.

The second problem is that business management must be handed over to new leadership. That means someone in the succeeding generation of the family must be able to step into the shoes of the retiring leader. If that person is one of several beneficiaries, the stage is set for a classic confrontation of interests. The managing family member typically wants to grow the business by reinvesting profits while the non-business family members generally want income in the form of dividends or other forms of compensation. This is the stuff family feuds are made of.

An obvious solution is to leave the business to the next generation of leadership intact and leave non-business heirs cash or other assets. Life insurance, trusts and other financial solutions can be used to develop a solution. The key is to craft a solution that meets the expectations of everyone in the family. And therein lies the real challenge; how to determine the expectations of everyone involved.

The key is to approach the development of the new wealth transfer plan as a process. Once wealth transfer planning is perceived as a process, it can be visualized as a series of steps and phases. The entire process can be illustrated as a circle with nine distinct steps and three phases (see page XX). The center of the circle, or the hub of the process, is the business advisor who plays the role of process architect and facilitator. This is the wealth transfer specialist.

In Phase One, the specialist examines the objectives of the individual family members by conducting extensive interviews and evaluates any existing plan. This is a critical phase because it is during this phase that the family interviews are conducted.

To ignore the needs and concerns of other family members in the business succession panning is to set the plan up for failure. The easiest way to find out what the various family members think about the future of the business and their role in it is to ask them about it. This means an in-depth interview of all family members - including spouses. The only effective way to interview all the family members are by meeting with each individual or couple privately. Generally, individual family members are not going to be honest and open about their innermost feelings if other family members are present during the interview.

If Phase One is completed with thoroughness and attention to detail, the specialist will have the information necessary to construct a new wealth transfer plan that will meet the needs of all family members.

Phase Two involves developing the new wealth transfer plan. It's also in this phase that the specialist meets with other trusted family business advisors to gather their input.

Phase Three is the presentation and implementation phase. Here the specialist reveals the new plan to the entire family in a retreat setting and assists in its implementation. It is at this point that the new wealth transfer plan is presented and the family is asked to adopt it.

To be successful, the new plan must be understood and accepted by everyone in the family. The best approach is to gather the entire family together in a neutral setting, away from the business, where they can relax and enjoy themselves as they ponder the proposed new plan together. A resort setting is ideal. Properly structured, the family retreat is an ideal opportunity for the whole family to share concerns, hopes, dreams and fears about the future.

At the end of the presentation, every family member must be convinced that the proposed new plan represents the best hope for his or her own future as well as the future of the family and business. Again, excluding family members from this phase of the process endangers the entire plan.

Compensation for the extra effort on the part of the wealth transfer specialist is accomplished by charging a planning fee. This fee is proportional to the complexity of the case, the market value of family assets and the number of family members to be interviewed. Depending upon the facts of the case, fees typically can range from $6,000 to $40,000 per case. Because liquidity is often a primary need in planning for wealth transfer, sales of life insurance and other financial products and services are common.

An additional benefit of treating the entire family as the client is the ability to expand the client relationship to other family members. Positioning the family as the client means that each family member sees the consultant as the principle resource for family business matters. When the entrepreneur dies, becomes disabled or retires, the specialist will be well positioned to guide the transfer. Without a connection to the family, the death of the entrepreneur often means the end of the specialist's working relationship with the business. Unless a concerted effort is made to cement a relationship early on, the next generation of owners may establish working relationships with other advisors.

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