Family Business

Hutcheson: Gift-giving within family business poses challenges

December 8, 2012 

Christmas is just around the corner and so it is time to go shopping. (Unless of course you’ve already endured a 5 a.m. Black Friday visit to Walmart or Target, or leisurely did your shopping in your pajamas on Cyber Monday.)

And with Christmas, the question turns to what to get your kids. For the owners of a family business, the question can be trickier than normal.

Most family businesses in the first- or second-generation can tend to run a little loose. Vacation days may not be counted up specifically, time clocks are not employed, and some fringe benefits are always present. When it comes to conversations about compensation, many times it is as difficult to calculate the total compensation package as it is difficult to tally up all the “family” benefits that would certainly not be present if your child were working for another company. As time goes on and new generations join in, it is incumbent on the current management to move the company to a more professionalized business where everyone, including family members, plays by the same rules.

Don’t mix business, personal

Trying to discern what is reasonable can be challenging when taking into consideration kids’ salary, which may have a degree of “family factor” baked in, along with the family fringe benefits and whatever bonus from work they may receive.

As a rule of thumb, all business-related compensation should remain business compensation, separate from personal gifts. More importantly, this needs to be communicated to your children. Many family businesses suffer from a certain degree of enmeshment: low personal and business boundaries, intensity of family interaction, difficulty discerning the family from the business and vice versa. Thus, when a personal gift is given, the child may not necessarily know if it is a reward for a job well done, or simply a gift for Christmas. Moreover, it could be a gift for the purposes of estate planning.

Effect of the ‘fiscal cliff’

Unless you have been on a mission trip to the Congo for the last year, everyone is painfully aware of the ‘fiscal cliff’ and the looming end of the Bush tax cuts. By this time you have already done what you are going to do, or time has virtually run out.

A family-business client of mine is just now contemplating transferring some business ownership over to the kids. However, the complications of setting up the various buy/sell agreements, creation of multiple classes of stock, future tax questions, etc. have raised so many questions that they are basically going to scuttle completing the deal by the end of the year. (Hopefully it won’t matter much.)

However, the annual gift-tax exclusion is not entangled with the fiscal cliff. It currently sits at $13,000 and is set to go to $14,000 by the IRS next year. These are gifts that you can give to anyone within the calendar year, tax free. Once the new year begins, you have another opportunity. (On a logistical matter, the gift typically occurs at the beginning of the year, so the Christmas present is usually a check that cannot be cashed for 7 days.)

Avoid pitfalls with money gifts

So while we might want to provide our children with a large check as a gift as a means of managing our estate, we need to balance this against our goals as parents to raise mentally and emotionally balanced children, with the appropriate perspective on money and wealth.

It should be explained that this is a one-time gift that is coming partially as a future tax avoidance measure. And it has nothing to do with the business or their performance in it. Going a step further, expectations can be placed on the gift. For example, buy some things you need, buy something nice for yourself, and then invest the rest.

Managing the effects of wealth and money on kids is tough. Just look at the impact on most lottery winners – most lose it all in a few years, state that it destroyed their lives and wish they had never won.

The Arizona co-winner of the recent $588 million Powerball jackpot has yet to step up and claim their half. Perhaps they will reject it to maintain their balanced life? Don’t you bet on it.

Henry Hutcheson is a nationally recognized family business speaker, author and consultant in Raleigh. He can be reached at Familybusinesscarolina.com.

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