Whether or not a family business will survive after the owner passes is questionable in most cases, if you believe the statistics out there (and I do). But even though the statistics regarding succession of family business to heirs can be discouraging, there is hope out there for many family businesses in the form of trusts.
This matter was addressed in a recent article in the Journal of Financial Planning titled “Investing in Future Generations: Evolution of the Business Skills Trust.”
First, let’s take a quick look at those troubling statistics. According to stats reported in the Harvard Business Review, “Less than one-third of family businesses survive the transition from the first to the second generation, and only about 10 percent survive the transition to the third generation.” What does this mean in real world terms? It means that while wealth (in the form of money or “ownership”) can be transferred through a bit of effort on the planning side, it is not the same as transferring the motivation and the ability to continue running a successful business.
So how can a trust help with providing motivation and ramping up the ability of the next generations? By providing incentives to heirs who are able to demonstrate proficiency in certain skill areas (for example, money management, understanding of the family business financials, etc.). As heirs or beneficiaries demonstrate increased understanding and ability by satisfying clearly defined objectives, they are allowed to assume greater responsibility over the property or business that is the subject of the trust. They also may be rewarded with increased distributions from the trust property if appropriate. Basically, they get more only after they prove they can handle it.
How you frame such a trust and the conditions you set to slowly bring a beneficiary or heir up to speed will depend on a number of factors. The original article offers some specific advice, but the main point is that this targeted form of incentive-based trust called a “business skills trust” can be a powerful tool.
If you have a business that needs to be run and a legacy to leave behind, then you could do well to investigate how such an incentive trust might further your plans.
What values do you want to enshrine in the trust and how can you offer the proper incentives to motivate your heirs to continue your success? The answers to these and other important questions will be specific to your situation and family, so it’s a good idea to think hard about your business goals and the skills and motivations of your heirs before consulting with a trusted professional who can help you put the appropriate plans in place.
For more information about the use of incentive trusts in business succession planning, or for answers to your other estate or business planning questions, contact us at Peak Legal Group.
Reference: Journal of Financial Planning (June 2013) “Investing in Future Generations: Evolution of the Business Skills Trust”