By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC
Have you ever asked yourself “If I give stock to one of my children, how do I protect it in case they become disabled, get divorced, or die?” I speak at many conventions, and business owners often ask me this question. This is important information that is not reviewed enough by business owners and their legal and financial advisors.
Only a small percentage of family held businesses have a “stock redemption agreement” or what is sometimes called a “buy-sell agreement.” If you do not have this type of agreement, we suggest you contact legal counsel to develop one. If you do have a stock redemption or buy-sell agreement, be sure it covers disability, divorce, personal bankruptcy, and employee termination. It is imperative that closely held and family business owners have the ability to control the ownership of their company stock under any of these circumstances.
Every stockholder in a closely held or family business should also have pour-over wills and revocable living trusts. Owners should transfer their stock to those trusts, if possible, to protect it in the case of incapacity or death. If a child dies before the parents in a family owned business, the parents have to make a tough decision. Do they buy the stock back into the company, which will increase their estate tax problems (they originally gave it away to save on estate taxes)? Or do they leave the stock in their child’s trust and continue to pay dividends, thus giving income to the surviving spouse and grandchildren?
In addition, as your closely held business grows and one of your children decides to get married, a “prenuptial agreement” should be discussed between your child and their future spouse. Be sure to include language not only on current assets, but on future gifts for both spouses in that agreement as well.
When bad things happen to good families, the more guidelines and procedures you have in writing, the better, especially when it comes to a closely held or family owned business. By not having these documents, you leave the door open to family members fighting over the payments of company money, stock values, voting control, and distribution of stock to ex-spouses.
Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .