For a family owned business to survive its founder, a plan for succession must be in place. Your answers to the following questions will reveal whether you have given adequate thought to such a plan.

1. Is there an overall strategic plan for business succession?
2. Will the succession plan be fair to family members (usually children) not in the business?
3. Can family members work together harmoniously in the family business?
4. Can the business function without the entrepreneurial personality of the founder?
5. Is the business saleable?
6. Is there sufficient capital to continue ownership of the business in the family?
7. Has a plan for management continuity been prepared and reviewed with family members and key employees?
8. Is competent management in place, with duties and responsibilities clearly defined?
9. Have compensation and ownership goals been clearly defined and reviewed with family members?
10. Have estate planning documents providing for ownership succession been prepared and signed?
11. Are buy/sell agreements in place?
12. Are business agreements, such as employment agreements, death benefit agreements, and leases in place?
13. Has a plan been developed to deal with personal guarantees of business obligations?
14. Have federal estate and state inheritance tax liabilities been calculated?
15. Is there sufficient cash available to cover the estate tax and inheritance tax?
16. Has the business been professionally valued, with the valuation updated on a regular basis, so as to make buy/sell and similar succession agreements fair and valid?
17. Is adequate life insurance in place?
18. Has a plan been developed (and possibly implemented) for the lifetime transmission of family business ownership to the next generation?
19. Does the business have a funded pension or profit-sharing plan, or an unfunded or indirectly funded deferred compensation agreement, that would provide the owner with some independent financial security upon retirement?
20. Is there a mechanism in place for resolving internal conflicts pertaining to the management of the family business?

If you answered “yes” to fewer than 14 questions, you should consider developing a plan for family succession of your business. Proper planning will not only help provide an efficient transfer of control of the business, but it will, in many instances, save the life of the buinsess itself.

What is a Fraudulent Transfer

A Fraudulent Transfer (a/k/a "Fraudulent Conveyance") is a transfer which a debtor makes for the purpose of defeating a creditor's collection efforts against the debtor. This typically happens when, say, a debtor attempts to "sell" everything to his wife, cousin or business partner for $5 to keep his stuff out of the hands of his creditors. If the court figures out that the transaction is a sham to defeat the creditor, the court will set aside the transaction and make the person holding the assets give them to the creditor. Basically, Fraudulent Transfer Law is this: You can't do anything which would impair the rights of your unsecured creditors, if you do then the courts will simply ignore what you have done.

Gifts and Donations

Fraudulent Transfer Law is primarily aimed at people who try to make gifts to other people to avoid their creditors.

The unexpressed rationale is that the gift was only made to keep creditors from getting it, and the gift will either be controlled by the person who made the gift, or they will get it back after the creditors go away. So right off the bat there is a control test: If you have made a gift to keep it away from creditors, but you really still control it, the gift will be a fraudulent transfer.

Another unexpressed rationale is that you shouldn't be making gifts if you are broke (if you are broke you should be receiving gifts!). So there is also an insolvency test: If you have made a gift while you are insolvent, the gift will be a fraudulent transfer.

You shouldn't be doing anything which would lessen your creditor's rights. So there is an intent test: If you make a gift with the intent of keeping it away from your creditors, the gift will be a fraudulent transfer. This is why you should never call an asset protection plan an asset protection plan, and why you should incorporate other planning into the plan. Call it anything else -- a tax plan, an estate plan, whatever -- just not an asset protection plan.

How Are Fraudulent Transfers Avoided?

The safest way to avoid fraudulent transfers is make sure that all transactions are at least close to being "for value." While "for value" transactions can still be set aside as a fraudulent conveyance, it is very, very hard for a creditor to prove.

Another factor is that the transaction must have economic substance. A transaction which does not have economic substance is likely to be deemed a fraudulent transfer, but a transaction which makes good economic sense under the circumstances is going to be very, very difficult for a creditor to defeat.

When Transfers Made

Timing, when the transfer was made, is often critical to the analysis as to whether a particular transfer amounts to a fraudulent conveyance.

Most fraudulent transfer issues arise where planning is undertaken only after the Client has incurred debts or suffered an unfavorable judgment. This is more dangerous for the planner than it is for the Client, because not only can a transaction be set aside, but a court in some states can award additional damages against both the Client and the planner.