How to Pass Along a Family Business

After 36 years of making pierogies, stuffed Polish-style pasta pockets, Ted Twardzik figured it was time to sell the family owned business he began on his mother's kitchen table.

By 1986, Ateeco Inc.'s 200 workers were producing four million pierogies a week. The company had become the largest employer in Shenandoah, an eastern Pennsylvania coal-mining town with a population of 7,000.

With sales approaching $15 million a year, Twardzik said he did not feel qualified to develop the company into a major player in the food industry. And, although his two youngest sons, Tom and Tim, were interested in stepping in, Twardzik felt they did not have the maturity or experience needed to build the company.

"The big problem is that if your business is successful, the estate taxes make it almost impossible to pass it along to your children and grandchildren," Twardzik said.

So, for two years, the Twardziks met with several prospective buyers, going as far as signing letters of intent with two different companies. With Tim and Tom at his side during negotiations, Twardzik said he watched them mature.

Finally, with coaxing from his sons, Twardzik said he decided not to sell the business. Last November, the elder Twardzik became chairman. Son Tom, 29, took over as president and Tim, 31, became vice president of marketing.

To make sure his employees were turning to his sons for direction, the chairman moved into a private office in the Elks Club building he owns down the street from his home.

Today, the family is in the throes of completing its succession plan, which includes the establishment of trusts, stock transfers and the purchase of insurance. The goal is to create a plan that will not only preserve as much wealth as possible, but provide for the company's future growth. Ateeco is also planning to form an outside board of directors to add new perspectives to their future plans.

The Twardziks face what millions of small, family-owned businesses are facing every day: how to pass the company along to the children without losing most of it to Uncle Sam.

The task is so onerous that fewer than one-third of the country's family-owned businesses make it to the second generation, according to Leon Danco, founder of the Cleveland-based Center for Family Business.

Uninterested children, squabbles over control and heavy state and federal estate taxes all work against the perpetuation of family business in America. Yet families like the Twardziks, who turned to estate planners for advice, have been able to work out the difficulties and keep the business intact.

"The classic plan is to leave the business to the wife," said Ronald Hartwick, an attorney who specializes in estate planning at U.S. Trust of California in Los Angeles. "But if all you have is that pure vanilla Pablum plan, it can be a disaster."

Hartwick, who has designed estate plans for about 200 small-business owners, said too many families focus on minimizing taxes rather than dealing with the broader issues of who will actually run the business. He and other estate planners recommend sitting down with your family and discussing the future much the same way you would plan a vacation.

"It's important to create a plan that the next generation will not tear apart," said Hartwick. "The inheritance business brings out the worst in people."

He encourages small-business owners to be as generous as possible while they are alive. Every taxpayer is allowed to give away $10,000 every year, tax-free to an unlimited number of individuals. And, under current federal tax laws, everyone is entitled to pass along $600,000 tax-free to their children or anyone else. This means, if properly planned for, a married couple with a small business could transfer $1.2 million worth of property tax-free.

As good as they may be, your day-to-day attorney and accountant may not be the best ones to draft an estate plan. They will, however, be able to recommend experts in the field. And you should be prepared to spend between $3,000 and $15,000 on the completed plan, depending on the complexity of your business and personal affairs.

For many families, buying a very large insurance policy to cover the business owner and his or her spouse becomes an attractive way to cover estate taxes and administrative costs. If you assign the rights to the policy to someone else and survive for at least three years, the proceeds may be paid to your heirs tax-free.

The premium on a $1-million policy is in the $20,000 a year range, depending on the age of the person insured. The best person to consult for this type of insurance is a Chartered Life Underwriter, who belongs to a professional organization that requires its members to take tough examinations and continue their professional education.

The late publisher Malcolm Forbes--whose empire would definitely not be regarded as a small business--used life insurance to provide his heirs with tax-exempt benefits to pay estate taxes.

Whether the money comes from insurance or savings, your family should have enough cash to buy out family members who do not want to retain any ownership in the company. The money should also provide financial security for the remaining spouse and be a comfort, rather than something to be fought over.

Steve Swartz, a partner in the accounting firm of McGladrey & Pullen in Minneapolis, said most entrepreneurs are more concerned about the continuity of their business than saving money on taxes.

"Most want to enjoy the business they created and then enjoy the prospect of having it continue at least one more generation," said Swartz, who has counseled about 200 family business owners on organizational and succession issues.

In trying to be fair, Swartz said, many family business owners put too much weight on equally dividing the business between their heirs.

"One man I worked with kept a notebook with six columns, one for each child," said Swartz. "He had kept track of what he gave each one from the time they were children."

But Swartz said in reality it is not possible to treat all the children equally, especially if some are involved in running the business and others are not. "Leaving the business equally to all of your children is a recipe for disaster."

Swartz and other family business counselors said the parents must consider their own financial security before starting to divide up and give away their business.

Apart from considering taxes and technicalities, a successful estate plan should begin with a full and frank discussion of your family's goal and dreams.

And, although you want to hear from your children, Swartz said estate planning should not be a democratic process.

"Discuss your plans, but don't ask your kids to vote on the plan," advises Swartz.

Environmental Rules to Be Seminar Topic

"Environmental Issues of the 90s," is the theme of a seminar set for Tuesday. The session is aimed at helping real estate owners and investors deal with new environmental regulations. The session begins at 8:30 a.m. and will be held at the Stouffer Concourse Hotel, 5400 W. Century Blvd., Los Angeles. For information call: 213-454-8030.

ESTATE PLANNING Sit down with your family and discuss what you envision for the future of your business.

Create an estate-planning team of professionals who specialize in family business issues.

Be sure you and your spouse have updated and properly written wills.

Evaluate the cost benefits of buying life insurance to cover estate taxes and other expenses.

Choose people you trust to manage your affairs after your death.

If no relatives are qualified or interested in carrying on the business, spend the next few years preparing to sell to a qualified outsider.

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