Drifting Towards a Legacy Limbo
SAN FRANCISCO—Wouldn't it be convenient if someone had clear, intelligent answers to most of your CRE-related questions? Problem solved. Nina J. Gruen, a.k.a. Ms. Real Estate, a.k.a. the principal sociologist overseeing market research and analysis at Gruen Gruen + Associates, is here to answer readers' questions.
Have a question for Ms. Real Estate? Click here, and it may appear in a future column.
Dear Ms. Real Estate:
I am a real estate developer in my mid-50’s who has spent the last 35 years building up a successful company. I have begun to face the fact that 20 years from now, it may be too late to make an important decision that will affect my family for years to come – that decision is whether I should be making arrangements to transfer ownership of my company to my three children or look for opportunities to sell the company and divide the resulting estate among my 23- and 26-year-old sons and 30-year-old daughter. Since they were 16, they each have had an opportunity to work part time and/or summers within the company’s primary departments. One of the three, my 26-year-old, has decided to make real estate development within the company his career.
Do you have any suggestions of whether to sell my company and establish an estate plan that bequeaths the proceeds to my family, or begin to transfer some of the ownership and control to my heirs? Also, am I right that I have to start making this decision now?
—Drifting Towards a Legacy Limbo
Dear Legacy Limbo,
The second of your two questions is an easy one. Yes, you have to start now to work with your family to achieve familial goals and identify and implement a wealth management strategy. Part of that strategy relates to your first question, whether to cede control of the reins of your business, as well as ownership, to the next generation of your family. You were wise to begin that evaluation years ago by giving your progeny a taste of working in your company.
Whether it is best to monetize and thereby diversify the value of your business, or transfer ownership within the family very much depends upon the dynamics of the relationships within your family and the emotional makeup, capabilities and interests of its members. In spite of what Tolstoy wrote about family similarities, both the relationships between family members and their real estate management capabilities and interests vary enormously. One of our real estate clients, with a business empire and a tightly knit, mutually respectful family, took note of a vast difference in the interests, capabilities and emotional makeup of his three children, and sold his concern to an international company and instituted a wealth management program that passed much of the proceeds to his family. He passed away many years ago, but to this day, the family he left behind functions in a way that would make him proud. This result stands in stark contrast to a strong-willed father who passed the control of his prosperous business, with offices across the country, to his son, in spite of the fact that his son and his two daughters had never been compatible with each other and were all as strong willed as he had been. The result has been a dysfunctional family whose wealth continues to be shared with the respective attorneys representing his heirs in an ongoing series of lawsuits.
To gain further insight into what works to keep the family and the business functioning well when the real estate company is kept within the family. Ms. Real Estate interviewed the founder of a real estate development and management company who had successfully kept the business and his family together, the latter being his greatest concern.
I began our conversation by asking, to what did he contribute the successful economic and familial transfer of his company to his four daughters? He began by clarifying that all situations are unique, and he had the following three advantages:
- Neither he nor his wife had siblings, so there were no competing family interests from his generation in taking over the ownership of his company.
- His four daughters have always been close, and all four had had the opportunity of working in the company. Only two, however, were interested in pursuing their careers there. Further, of those two, only one so enjoyed the work she voluntarily committed 12-hour days working at the company, while the other, while enjoying the work, also wished to spend time in other pursuits. The former daughter is currently the CEO. The remaining two daughters selected other careers, but all four make all critical decisions together as Board members.
- A mutual family decision was made to prohibit all sons-in-law from working in the company.
I next asked what his primary contribution was to the successful transfer of his company – in addition to the fact of obviously being a fantastic dad. His response to this question was that he knew he had to break up the parent company into smaller companies in order to transfer both the equity and control to his daughters. So he said the first step in the process was the need to employ a highly competent tax attorney and appraiser to be sure that the structure of future deals would stand up 100% to governmental scrutiny. Next, he bought out the minority interest in some of his properties that had been held by one of his lenders. Once in total control, he broke up his parent real estate companies so that his daughters could purchase ownership in those companies over time, starting off with a 30% interest, under a financing arrangement that, by 2023, would provide the daughters with 100% ownership. Currently, their individual share of ownership is approximately 20%. All four daughters sit on the Board, and continue to be the primary decision makers, while one of them works diligently in the company and is currently his company’s CEO.
There is no one-solution-fit-all answer to whether it is better to pass on a family business to future generations or take the money out in a tax-wise way and include it as part of your family’s wealth management plan. The best way to proceed is to consider how your family will function under either option.