Keeping Family Wealth in the Family

Keeping family wealth in the familyFamily businesses are often the primary source of wealth for the family members involved. That wealth usually comes in the form of salary, perks or investments that the business makes, such as the real estate from which the business operates. But businesses often do not give enough thought to keeping the wealth in the family. Here are some ways to help enhance retirement, plan for upcoming college costs, or help a family member begin with a new stage of life.

  1. Consider hiring a spouse. There are often opportunities for spouses to perform some services within a family business. Office-oriented tasks such as paying bills or assisting in collecting aging accounts receivable are options. An added benefit is your company’s retirement plan. Depending upon the plan’s provisions, a working spouse may be eligible to put all of what he or she earns into a qualified plan, essentially making the earnings tax free. This way, as husband and wife, you may be able to double what you can put away for retirement without increasing your personal taxes. If your spouse doesn’t meet the eligibility requirements for the company’s plan, he or she can typically put money into a Roth or traditional IRA.
  2. Ask children to help in the family business. Cleaning the shop floor or painting the offices not only builds character, it is a great way to help fund college tuition. Hire age-appropriate children to help around the business. The money they earn can be put into a 529 plan for college or even a Roth IRA. One advantage with the Roth IRA is that contributions can be taken out at any time without penalty. If the child is then fortunate enough to receive a scholarship or has a change of plans, the money in the Roth IRA can be used for their retirement. There are even provisions that allow distributions to be made for the purchase of their first home without incurring a penalty.  When employing family members, keep in mind that IRS rules state that services must be performed in order to receive a paycheck. Also, wages that are paid should be commensurate with the services that family members are performing.
  3. Consider creating a family bank. A family bank is a legal entity that is run as a separate business but is not established as a regulated entity. The “bank” should communicate a clear vision and guidelines for its lending requirements. Often, these entities are run with nonfamily members and have an outside board of directors. Typically, senior generations will fund this entity with money to lend to family members. The loans are often granted to start a new business, buy a home or help fund college tuition costs.   

Employing these strategies requires upfront thought and planning, but they can be great ways to keep wealth within the family and incentivize future generations to keep the legacy of the family business.

Steven E. Staugaitis can be reached at Email or 215.441.4600.