Strategic Wealth Transfer Planning for Manufacturing & Distribution Families

Techniques for M&D Businesses 

In the manufacturing and distribution (M&D) space, the relentless pressures for efficiencies, tighter inventory controls, better logistics, employee retention and management, supply-chain improvements, and tech-enabled modernization are essential details M&D organizations must prioritize for long-term success. Strategic growth takes intense planning and teamwork in this industry, and organization owners and leaders need to apply pressure to enter this stage of growth. Key managers play a large role in this, as the company's managerial styles and employee relationships are important. Managing the business becomes more complicated when business partners and employees are family. 

According to The Century Foundation, “[s]mall manufacturers make up the lifeblood of U.S. supply chains, as 87 percent of all manufacturing establishments have fewer than fifty employees. The ownership of these manufacturing firms varies, but a large share of them is privately held and family-owned.” While the Small Business Administration estimates that about 70% of privately owned businesses will be sold to new owners, with the right preparation and education, they can also be passed down generations within a family. 

For family-owned M&D businesses, having a clear succession plan is pivotal. This involves identifying potential leaders within the organization, aligning their outlook with the company’s vision, providing them with the necessary training, and ensuring a smooth transition of management. Whether it is financial motivation, passing control and key decision-making responsibilities, or financing the sale of the company over time, having a sound succession plan is essential for long-term success. 

Managing and Transferring Wealth Across Generations 

Securing Your Legacy 

Succession planning leads to successful generational wealth and a secure future for your family. Conversations about transferring ownership to beneficiaries and inheritors should be proactive, transparent, and meant to ease the process for all involved. 

Financial knowledge is crucial for a successful transfer of wealth, and families should meet with a financial advisor together. The meeting is an opportunity to educate the inheritors on the origin and growth of the wealth, share family values and goals, and set expectations. During this meeting, those passing their wealth down should communicate their intentions. Hence, all family members understand their individual roles, the amount and type of wealth each inheritor will receive, and the transfer timing. Throughout this process, financial advisors serve as the liaison between generations, mitigating emotions and educating family members on managing their part of the family’s financial matters. Talking about the transfer early on is recommended as it allows those giving their wealth to communicate their feelings and feel confident that those receiving are educated and ready to take over. 

Families need to prepare for the unexpected; however, untimely losses occur. In these situations, a financial advisor can help facilitate a meeting, aid in financial planning, and give fund management guidance. They will work to develop trust and accountability between family members and establish a monetary plan, overall helping the grieving family feel a sense of financial security. 

If significant assets remain, the transfer may occur during both parties’ lifetimes. Some families take advantage of this option to decrease the size of the estate, taxes, and legal fees, like probate expenses, following a person’s passing. 

Life Insurance Planning & Wealth Management 

Things to consider regarding life insurance: 

• Importance of life insurance for high-net-worth families
• Beneficiaries on retirement accounts and life insurance policies
• Types of life insurance coverage available
• Using life insurance as part of your charitable giving/donation
• Timing
• Impact of life insurance proceeds on business value (e.g., Connelly v. United States, 144 S. Ct. 1406 (2024)) 

Estate Transfer Planning 

Deciding who should inherit one’s estate is a complex task, and figuring out what is fair can feel like an impossible burden. Those passing their wealth down should meet with an estate planning attorney for professional advice annually to review documents and verify accuracy. This can help discover areas needing updates or improvements and gaps in necessary information. When an important life event occurs, your attorney should know. These events can include birth, adoption, death, marriage, or divorce, impacting your estate documents. 

When the individual passing the wealth down is comfortable with the documentation and plan, they should review it with their family/inheritors. A financial advisor can also create an estate plan report based on the currently completed documents to demonstrate where the assets would go in the event of an unexpected passing. 

Whom to Transfer to 

When transferring the business to future generations, several issues must be considered. One key question is to whom to transfer the business. Candidates include co-owners, key executives, children, or any combination. If the goal is to keep the business in the family, the situation can become more complicated when some of the owner’s children are involved in the business while others are not. In this case, their desire to treat all children equally may be difficult. 

Transferring to a Child 

If the transfer is to a child, the next question is whether it should be outright or to a trust for that child and future generations. A trust could give the owner more control and make sure the business stays in the family. 

Valuation, Discounts, and Cash Flow 

Other issues to consider are valuation and discounts. For example, if an owner owns a majority interest, the company may be reclassified into voting and nonvoting shares. The owner could transfer nonvoting shares or a minority interest to several children and/or potentially do so over several years. In both cases, discounts for lack of control and marketability would apply to reduce the values of the gifts that may not apply if held until death. Plus, the owner may be able to get a lower value now, especially if expecting a sale or exponential growth in the future. 

Cash flow is usually another big concern for the transferring owner. If this is the case, they may be able to stay on as an employee or consultant. Another idea is for the owner to sell his interest to a trust and take back a note. 

Of course, with any gift, the owner would have to weigh the costs of losing the step-up in basis against the potential estate tax on future income and appreciation. 

Things to consider:

• What is the estate settlement process?
• How to minimize estate tax liabilities 

Summary 

Generational wealth can be complicated. Relying on financial advisors for guidance can help the transfer run smoothly. Schedule an annual meeting with a financial advisor to review your plan and refine it as new ideas, opinions, or concerns arise. Continual family discussions are important and will help communicate intentions and maintain expectations. 

Discover how our experts in holistic wealth management from Prosperity can assist you in planning your family wealth transfer. Contact us today to discuss how we can support you.