Banking & Finance  September 25, 2022

Legal experts: Having a plan important to generational transfer

Attorneys may disagree on approach, but they generally all agree that if family members don’t plan, they’re not likely to be able to bridge from one generation’s ownership to the next.

“Having a strategic plan in place is critically important,” said John Gaddis Jr., an attorney with Boulder law firm Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC. “There are certain tax strategies that can take five or more years to season; being in constant communication over the years is critically important,” he said.

Stewart, Sean
Sean Stewart

Sean Stewart, an attorney with the Longmont firm Lyons Gaddis PC, concurred and said, “my biggest advice is that just because it’s a family-run business doesn’t mean they don’t need corporate policies. … Clear legal documents prevent arguments. They need to be clear in the operating agreement or bylaws that spell out how a company unwinds. A lot of families think, ‘Oh, we’re family; we’ll figure it out.’” [The two law firms are not related; Longmont attorney John Gaddis Sr. and Boulder lawyer John Gaddis Jr. are father and son.]


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Matt Stamski, an attorney with Faegre Drinker Biddle & Reath LLP’s Boulder office, said attention to detail is important.

“The ones I work with personally, it’s [generational transfer] something that is in the DNA of the family, integral to their values. They devote a lot of time and attention to it, and I mean the transfer process itself.”

“The ones who have done it well focus on the intangibles — the culture, mission, educating the next generation, the place in the community. Not so much on the profit and loss and balance sheet. Then the next generation feels more invested, more of a connection with it,” he said. 

Stamski, Matt
Matt Stamski

The generations have to be in alignment, Gaddis said. “I’ve seen situations where members are all aligned, where family members are all involved prior to the transfer. Having younger members involved before the transfer for years helps make sure there’s alignment between generations.” He cautioned that older generations need to be willing to change with the times or risk frustrating the younger family members who might see a different or better way.

Gaddis said continuity planning is important. The retiring family member might need an income in retirement, and that has to be accounted for in the plan. Family members shouldn’t assume that succeeding generations will be open to paying a retiree for life, he said.

Gaddis Jr., John
John Gaddis Jr.

Tools to succeed

  • Older generations can transfer shares of the company to children over time where the children buy the shares. An installment sale can be set up that permits the children to buy the equity in the company using a promissory note. Future company income pays off the note and thus compensates the older generation during retirement, Gaddis said.
  • A grantor annuity trust, in which a grantor sets up a trust and receives annuity payments for a fixed period of years, can be used to transfer the assets of the company to the next generation with limited tax liability, he said.
  • Older generations passing a business to the next generation can often avoid capital gains taxes on the value of the business if the business passes at the time of their death, Stewart said. The business steps up in value at death, but the next generation is not liable for the gain. The succeeding generation may be liable for estate taxes, however. Sometimes a life insurance policy on the older generation can be used to pay off the estate taxes.
  • In cases with multiple members of the next generation, it might be necessary to have additional sources of capital in order to buy out some members. Those sources of capital might come from capital partners, said Stamski, although it is important to proceed with an eye toward maintaining control of the capital stock. “Families want to keep stock in the family, but if that isn’t feasible, then you still want to have control and a voice over who the minority partner might be,” he said.

Open communication is important for a succession plan to work. It requires willing participants — older generations shouldn’t assume the younger generations will want to continue in the company, the attorneys said.

Involvement of succeeding generations is important so that the culture of the company is maintained and also helps the older generations to see who specifically might rise to a leadership position.

When succeeding generations include multiple members, maintaining fairness is important, even with family members who don’t want to be part of the operation in the future, Stewart said.

If the succession plan isn’t seen as fair, then disagreements can derail the plan.

“When there isn’t a plan, egos can get in the way. Familial history can get in the way. All families have issues,” Gaddis said. “It’s important to have those issues left outside the workplace. When you don’t have a strategic plan that addresses decisions, growth strategies, investment capital and where it comes from and amounts of investment capital, then it’s easier for those familial issues to grow and overtake the business itself,” he said.

Ken Amundson
Ken Amundson is managing editor of BizWest. He has lived in Loveland and reported on issues in the region since 1987. Prior to Colorado, he reported and edited for news organizations in Minnesota and Iowa. He's a parent of two and grandparent of four, all of whom make their homes on the Front Range. A news junkie at heart, he also enjoys competitive sports, especially the Rapids.
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