Family Issue to Deal With

Avoid Family Conflicts
Family owned businesses, like all businesses, will experience their fair share of conflicts. Because the people working in the business are family members, issues involved can run even deeper and tempers can run much higher.

As the owner of the business, you will need to investigate ways to manage family issues and minimise conflicts that arise. Perhaps the most valuable thing to consider is to plan ahead so that strategies are set in place which can be brought out when a crisis arises.

Some recommendations for averting crises in the family business include:

  • Develop an estate plan.
  • Adopt a succession plan to provide for someone to run the business.
  • Enter into a buy/sell agreement with the other shareholders to prohibit transfer of family shares outside of the family.
  • Consider having an outside adviser on the board, bringing an independent view where members of the family disagree.

It's a good idea for a family business to have in place a conflict resolution procedure and this can be written in the documentation of the business. This may include referring the matter to an outside respected family friend, or a lawyer, or accountant, to set arbitration and make a decision that both sides of the family can respect and accept.

Guidelines for Conflict Resolution
Even if your family get along very well in business, it's still a good idea to think about how to deal with conflicts before they arise. The more open your family is about how to handle conflicts, the better the chance of your business succeeding and running smoothly, because disagreements can be dealt with quickly and will not affect the ongoing performance of the family venture.

Some guidelines include:

  1. Hold regular family meetings to discuss any issues that arise and settle any disagreements.

  2. Adopt a system of evaluating the performance of each family member in a way that arguments don't arise and only with the view of improving the performance of the business, rather than pointing out any flaws or weaknesses a family member may have.

  3. Set out a formal policy that will govern how the family participates in the business and the duties and responsibilities of each member.

Do You Need a Family Trust?
You should ask yourself the question of whether you need a trust at all. In other words, what are your reasons? You may want to protect the family assets to ensure they don't fall into non-family hands. You may want to ensure protection in case of marriage break-ups, or you may want to provide for children from different marriages, and have been advised that a trust is the way to go.

Many people in business, especially in the professions, set up trusts in order to protect the family home in case it gets drawn into claims against the business. They establish trusts so their investments, property and other assets are not held in their own name, so that they cannot be in “the firing line” for claims against them personally in the event of bankruptcy or similar.

Some people use trusts for taxation. There may be an advantage in running income through the trust so it is taxed at a lower rate but only if it is properly distributed.

6 Traps with Trusts

There are often nasty traps that people need to be aware of when setting up trusts.

Some of these are:

  1. Unexpected costs. Setting up a trust can cost a lot more than most people think.

  2. Death of a partner. If one partner dies before a gifting programme is complete, the debts owed by the trust to the estate are treated as an asset of the estate.

  3. Rental properties. Transferring a rental property to a trust can involve repayment of depreciation claims against the rental property assets.

  4. Having wrong trustees. If you choose the wrong trustees (whether family members or outside professionals) it can cost a lot of money and headaches, not only in the stress of sorting out problems, but also in any disputes that may arise.

  5. Tax avoidance. If you set up a trust purely to avoid paying tax, the Inland Revenue can see this as a scheme to avoid tax and still assess you for the tax, as if no trust existed.

  6. Sham trusts. If you retain too much control over the assets the trust can be regarded as a sham and can be challenged by organisations such as the IRS.