Uncle Sam's role in the family business

There is a silent partner in every family business, and his name is Uncle Sam. To ensure the government only gets what it's entitled to, family-owned businesses should consider several issues when transferring assets from generation to generation.

Many experts say all family members involved should speak to an attorney or a certified public accountant to start succession planning. Some of the issues to be discussed might include:

· What is each family member's philosophy regarding the transferring of assets?

Sometimes, family members assume they will automatically receive the company at some time in their life, while the owning generation believes they should earn it.

· What are the needs and wants of each generation?

The owning generation may choose to limit estate taxes and give the company to the next generation during the owner's lifetime; however, this may cause tax complications for those who take over the business. If the business' future looks promising (for example, if a five-year contract has recently been awarded), the owning generation may also try to transfer assets earlier, while the business' value is lower, to get appreciation out of the estate.

· Is there a buy/sell agreement in place?

Documenting how stock is to transfer hands among family members will help ensure it goes smoothly. Often stock is transferred at the time of death, a time of emotional turmoil. By having a buy/sell agreement, everything is laid out as to what will happen and when. The buy/sell agreement can also clarify when stock is to transfer hands at times such as disability, retirement or divorce. A buy/sell agreement can help eliminate awkward situations among family members - those involved and those who think they are - at Thanksgiving dinner.

· How will the value of the company or its stock be assigned?

There are specialists who charge a lot of money to do this. Some insurance companies will also appraise a company. This method can be less expensive, and is sometimes available at no additional charge. The difference is important only if the value is contested. The Internal Revenue Service's statute of limitations on contested claims is three years from filing.

· Does the owning generation need additional income for retirement?

Ownership or leasing of the company's facilities doesn't interfere with Social Security income limitations, and can be a great way for the founders to continue to receive income once they have started to transfer assets. The facility should never be part of a corporation because owners don't get the same capital gains benefits in a corporation as individuals. Note: The facility can be part of a limited-liability company, partnership or other arrangements, but you do not want it in a standard corporation.

· Do you have a will or a trust?

According to the American Bar Association's Web Site, www.abanet.org, "Like a will, a living trust can provide for the distribution of property upon your death. Unlike a will, it can also (A) provide you with a vehicle for managing your property during your life, and (B) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the appointment of a guardian for that purpose."

Establishing a trust can cost just a few hundred dollars, depending on your attorney and the number of titled items to be entered into it. There are several trusts available, including "irrevocable" and "revocable." Ask an attorney about them and understand the details before committing to one.

· Are you willing to review and update documents related to transferring assets every year or two?

According to Jim Dickinson, writing in the National Center for Family Business' Family Business Journal, "Relationships, laws and life in general evolve and change continually throughout a lifetime. Because of this, even the best-prepared estate plans become stale. While many factors may cause a plan to become obsolete, the three leading causes include changes in beneficiaries and their needs, changes in assets and changes in probate and tax laws." More information is available at www.fambizadvice.com.

The information provided here is just to start you on your way to succession planning. Information related to tax issues has been provided by a St. Louis-based CPA. Consult an attorney or accountant for personalized advice.

For information on attorneys in your area, contact the local bar association or visit the American Bar Association's Web site at www.abanet.org. Another resource is the AARP's Legal Services Network at www.aarp.org/lsn. You do not need to be a member to use this service to find an attorney.

For help finding certified public accountants or information on tax and accounting issues, contact your state's chapter of the National Society of Accountants or the American Institute of Certified Public Accountants at www.aicpa.org. When deciding on an attorney or a CPA, it is important for you to interview each candidate, just as you interview or research a new physician. The relationship between attorneys, CPAs and their clients is just as important as the relationship with a family physician. Many attorneys and CPAs will be glad to give you a 30-minute interview at no charge. Another excellent resource for tax issues is Uncle Sam himself at www.irs.gov.

Walter McCarty stands in front of McCarty Bros. original office in January 1937. Photo courtesy of McCarty Bros. Inc.

Times, ownership change at Illinois HVAC company

One example of a family-owned business that has experienced changes in ownership is McCarty Bros. Inc.

Walter McCarty Jr., 59, has been working at McCarty Bros., located southwest of Chicago in Romeoville, Ill., since he was 6 years old. His first job was sorting fittings in the basement. Walt is the second-generation owner of this HVAC company. McCarty's father started what was then called Western Refrigeration in 1932 after quitting college at Armor Institute (now the Illinois Institute of Technology).

Although McCarty's father was just 12 credits short of an engineering degree, he wanted to do service work on central-station refrigeration units in apartment buildings in Chicago that had been installed by his father (an original McCarty brother of McCarty Bros. Inc. when the company was a general contractor). While a general contractor, McCarty's grandfather's company helped build the golden dome that sits atop the administration building at Notre Dame University.

In 1934, Western Refrigeration became McCarty Bros. Equipment Corp.

During World War II, the company installed refrigeration systems in "Liberty" ships as they came down the Chicago River from Lake Michigan. In 1964, after McCarty's grandfather had died, the name again became McCarty Bros. Inc.

In 1976, Walter McCarty Jr. was given shares of stock from his parents and became an owner in the company. When his father passed away in 1995, the agreement stated that Walter McCarty Sr.'s stock go into the company as treasury stock, leaving the younger McCarty the sole owner. Today, his wife Carol is the company's president and chief operating officer.

The company does approximating $750,000 a year in sales. As McCarty puts it, "My job has now become that of one who pushes the cart," and adds that he loves every minute of it.