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A Better Partnership


Sep 2001
September 01, 2001

Estate Planning Alert

Topics included in this issue:


Making Management Succession a Part
of Your Business Succession Plan

By Mark K. Harder

Succession planning is one of the most important and challenging strategic issues facing family businesses today. As the senior generation that formed family businesses in the 1960s and 1970s reaches retirement age, they are actively seeking to pass the business to the next generation. Successful succession planning requires:

  • A plan for transferring the ownership interests in the business
  • A plan for transferring the management of the business
  • A plan for addressing the financial security needs of the senior generation
  • A plan for addressing income, gift, estate and generation-skipping taxes
  • Strong family relationships

Many families focus upon the transfer of ownership, the financial security needs of the senior generation or taxes. However, a plan for management succession often is given inadequate attention.

In today's economy, many industries are faced with consolidation of customers, consolidation among competitors, shrinking margins and competition from new technologies and global competitors. To successfully navigate these challenges requires strong leadership and management. The ability to successfully transition the family business to the next generation is often dependent upon the ability to successfully transition management.

This issue focuses on the family employment policy and mentoring as tools to assist in this process. Our spring issue will focus on dealing with nonfamily management and what to do when the heir apparent is inadequate.

The Family Business Employment Policy

An important step in successfully bringing family members into leadership roles is to recognize that leadership and management roles must be earned and not bestowed as a birthright. One way family businesses do this is through a family employment policy.

A well-thought-out family employment policy will set forth the minimum criteria for employment of family members in the business, and for their promotion, accountability and compensation. The policy may require certain education and experience prior to employment that is commensurate with the position, or employment outside the family business with one or more promotions elsewhere before being considered for employment in the family business.

The policy should require that family member employees undergo the same or an equally rigorous review process as nonfamily employees. An advisory board or outside board of directors can be particularly helpful here. As objective, dispassionate observers, they can forthrightly assess the development, progress, strengths and weaknesses of the family member.

The policy should make clear that family members will be held accountable in the same manner, and suffer the same consequences, as nonfamily members for failing to perform at the level expected for the position. This may take the form of reduced or eliminated incentive pay or bonuses, delay or denial of promotions or increased responsibilities, reassignment or, in extreme cases, termination of employment.

Finally, the policy should require that compensation be commensurate with the responsibilities and performance of the family member. Using outside advisers can again lend objectivity to this process.

Establishing and following a family employment policy sends important signals to all family members and to nonfamily employees of the business. To family members who are inactive in the business but who might wish to be employed in the business it sends a clear message: You are not entitled to a position by virtue of your bloodline, but must earn it and retain it on your own merits. For inactive family members who maintain an ownership stake, it helps assure that their investment will be properly managed and the fruits of the business will more likely be shared fairly. To nonfamily employees it sends an important message that merit is important and the existence of and adherence to the policy can assist in the retention of key nonfamily managers.

Grooming and Mentoring

Grooming and mentoring are also important to the successful succession of family members in management roles. A formalized development program gives the family member an opportunity to prove his/herself, hone his/her skills and earn the respect of other employees before becoming an executive in the business. Over the long term this is important to both the family members and to non-family employees.

For example, the family member could be required to spend an extended period of time rotating through all aspects of the business, from the factory floor, to engineering, to sales and marketing, and to finance, before occupying an office in the executive suite. The rotation through nearly all departments can develop a respect for the skills required and abilities of the dozens of different kinds of people employed in the business and an appreciation for the tasks and challenges faced by them.

Another means of providing mentoring and grooming is to involve the family member in planning sessions and to have the family member sit in on meetings to observe the development of tactical responses to challenges faced by the business.

Regular feedback from the nonfamily managers of the company is crucial to a grooming program and requires the senior generation of the company to foster an environment and relationship with his/her managers in which honest discussion of the family member's strengths and weaknesses can occur. For example, current managers might meet regularly with the specific agenda of discussing with the senior generation the progress and development of the family member.


Successful passage of a family business to the next generation requires careful attention to development of leadership and management skills. The chances of grooming a younger generation into effective leaders are improved through implementation of a family employment policy and attention to the special circumstances of nonfamily members of the management team.

Falling Interest Rates Affect Estate Planning

The United States is currently enjoying a period of the lowest interest rates in recent history. Changing interest rates can impact planning tools under which an individual retains an interest in property given away. Gifts made under those tools are referred to as "split interest gifts" because two interests are established--the interest retained and the interest given away. Some estate planning tools through which split interest gifts are made are enhanced when interest rates are low, while others are adversely affected when interest rates are low.

Split Interest Tools Benefited by Low Interest Rates

  • GRAT. A Grantor Retained Annuity Trust (GRAT) is an estate planning tool under which an individual transfers property to a trust in exchange for an annuity over a specified term, at the expiration of which the remainder interest passes to non-charitable beneficiaries such as children. The value of the gift is the value of the remainder interest. The lower the interest rate when a GRAT is established, the lower the value of the remainder interest and gift.

  • CLAT. A Charitable Lead Annuity Trust (CLAT) is similar to a GRAT–there is an initial annuity interest for a specified term followed by a remainder interest. The annuity interest, however, is paid to a qualified charity rather than to the individual creating that trust.

    The lower the IRS interest rate for the month in which the CLAT is established, the larger the annuity interest payable to charity. The larger the annuity interest payable to charity, the larger the charitable income tax deduction allowed.

  • Transfer of a Remainder Interest in a Residence or Farm to Charity. If an individual transfers a residence or farm to charity but retains a life interest in that property, then the individual is allowed a federal income tax deduction for the gift of the remainder interest to charity. The value of the remainder interest and charitable deduction increases as interest rates decrease.

Split Interest Tools Hurt by Low Interest Rates

  • GRIT. A Grantor Retained Interest Trust (GRIT) is similar to a GRAT except that the individual creating the GRIT retains an income interest rather than an annuity interest for a specified period. The gift is the remainder interest. A decrease in interest rates will reduce the value of the retained income interest, thereby increasing the value of the remainder interest that constitutes the gift.

  • CRAT. A Charitable Remainder Annuity Trust (CRAT) is similar to a GRAT except that the remainder interest passes to one or more charitable beneficiaries. The individual establishing a CRAT wants the remainder interest as large as possible because the individual is entitled to a charitable income tax deduction with respect to the remainder interest. The lower the interest rate when a CRAT is established, the lower the value of the remainder interest passing to charity.

Split Interest Tools Not Affected by Changing Interest Rates

  • GRUT. A Grantor Retained Unitrust (GRUT) is like a GRAT except that the interest retained by the individual establishing the GRUT is a fixed amount of the trust principal valued annually (e.g., 5 percent of the value of the trust property determined on January 1 each year). Payments are unchanged by changes in interest rates.

  • CRUT. A Charitable Remainder Unitrust (CRUT) is similar to a GRUT except that the remainder interest passes to charitable beneficiaries.

  • CLUT. A Charitable Lead Unitrust (CLUT) is the opposite of a CRUT--the charitable beneficiaries receive the current interest and the remainder interest passes to non-charitable beneficiaries.

Changing interest rates do not affect the value of the current and remainder interests in a GRUT, CRUT or CLUT, because interest rate changes inure uniformly to the benefit of the current and remainder interests. Thus, each of those planning tools is useful during a period of changing interest rates.


Individuals who are inclined to make split interest gifts during a period of low interest rates should consider the impact of low interest rates on such planning. Those individuals should also consider the use of estate planning tools that are enhanced by low interest rates (a GRAT, CLAT, a charitable remainder interest in a residence or farm). We stand ready to assist you with respect to these estate planning tools.

Constant Tax Changes Require Review

By James J. Steffel

The Economic Growth and Tax Relief Reconciliation Act enacted into law June 2001 (the "Act") substantially altered the future of our wealth transfer tax system (the tax rules applicable to estate, gift and generation-skipping transfer taxes, as well as related income taxes). Because of specific budget reconciliation rules, the significant changes (which will occur almost annually) under the Act will only last for ten years. The termination of the new laws that will automatically occur in 2011 is known as the "sunset" of the legislation.

Don't Hold Your Breath

One of the big media hypes during the legislative process preceding the Act, and an issue of particular concern to our estate planning clients, was the long-awaited repeal of death taxes. As it turns out, the long-awaited repeal remains just that (long awaited) as the actual repeal of death taxes does not occur until 2010. Worse yet, the "long-awaited" repeal is also "short-lived," as it sunsets a mere one year after becoming effective. So, if you didn't fully understand repeal before, you now realize that all the talk and hype boils down to what might occur nine years from now, for a period of one year, if there are no legislative changes between now and then.

Constant Changes Unknown

Between now and the long-awaited and short-lived repeal: the highest rate for both the estate tax and the generation-skipping transfer tax changes six times, the highest rate for the gift tax changes seven times, the estate tax-exempt amount changes six times, and the generation-skipping transfer tax-exempt amount also changes six times (although during three years of those changes the generation-skipping transfer exemptions will have inflation indexed increases that do not apply to the estate tax exemption). In fact, the only variable of the wealth transfer tax system not set for multiple changes during the next decade is the gift tax exemption, which is currently set to only change once in the next decade.

Additional Changes Anticipated

Additionally, conventional wisdom is almost unanimous that new federal legislation will eliminate many of the latest changes before they become effective. Further, there is widespread belief that the loss of the state death tax credit under the Act will trigger new state death tax laws around the country.

A Moving Target

Planning in this ever-changing environment will be difficult, at best. Although we, as estate planners, have traditionally prided ourselves on using formulas and flexible drafting to accommodate changes, never have the anticipated changes been so plentiful and significant. Further, changes of this magnitude were not contemplated under plans that pre-date the Act.

What all of this has made clear is that the only constant going forward will be change. As the rules change, so do the results of your plan. Therefore, you now need to make periodic estate planning reviews another regular maintenance item in your already busy life.

We will continue our attempt to keep you informed of the anticipated changes through the Focus. However, we can only alert you to the legal issues and changes in general, all of which will impact individual estate plans in unique ways. For that reason, nothing can replace the value of a periodic personalized review of your plan. As a general rule, you should have an estate planning review at least every two to three years.

We encourage you, now more than ever, to implement regular planning reviews so that your arrangements remain consistent with your intentions.

Estate Planning Alert


Editor: Susan Gell Meyers

Trusts & Estates Group Chairman: Mark K. Harder

Estate Planning Alert is published by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the firm's Trusts and Estates Group.

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