Grantor retained annuity trusts (GRATs) are also popular now, as is generally the case when interest rates are low, because earnings that are higher than the prevailing interest rates when the trust is set up will not be subject to estate tax. In this type of grantor trust, the grantor retains the right to receive a fixed dollar amount for a specified period of time, after which his interest terminates and the asset is distributed to the beneficiaries or the trust continues. A GRAT is a useful technique if the head of the family business wants to step down but continue getting income from that business. However, the caveat in using a GRAT to draw down the value of an estate is that if the grantor dies during the term of the trust, at least some of the assets will still be included in the estate and thus subject to estate taxes.

Most advisors warn against allowing young children or any family members who don't work for the business to hold voting stock. "Not only is there risk of exposure to liabilities, but also each member of the partnership has an equal say in the management of the partnership," says Mezzullo. "But giving equity interest only to heirs who are going to run the business isn't always possible, because the business is often the family's main source of wealth, and often the most illiquid asset." When that is the case, he recommends transferring shares with a series of put and call options designed to discourage casual buying and selling. The children who are not active in the family business have the right to sell their shares at any time, but at a put rate that is somewhat below fair market value, while those who are running the business can offer to buy out their siblings, albeit at a call price that is slightly above the market value.

The Family Dynamics
All it takes to set up the financial transfer structure is a team of experts. Making sure everyone in the family is happy with the succession plan is another matter entirely, and generally the biggest challenge, experts say.

"You see plans that are great from the financial and legal standpoint but fall apart because they don't take the soft side into account," says Sam Lane, a corporate psychologist and consultant with the Aspen Family Business Group, an international family business consultant. In the best-case scenario, says Lane, the family starts preparing the younger generation around the age of 15. While most advisors recommend an annual family meeting, Lane recommends bringing the family together for a discussion of the business two or three times a year.

Family meetings are always a good venue to talk about a family mission statement with the next generation, and the mission should incorporate the ethos of the family business. Mezzullo suggests designing one mission statement that sets out the core values of the family and the role the family wishes to play in the community, including charitable desires, and a separate mission statement for the company. The company statement, he says, "will highlight the different considerations that go into the business relationships as opposed to the family relationships." Also on the table at family meetings should be an annual review of the strategic plan for the family business-a five- to ten-year plan. This might spell out the timetable for the business succession plan, with specific dates.

All of these measures will help the members of the next generation grow up understanding what the family business does and what roles they might play in it. But even in families that hold open discussions with the young generation, "it takes time for the children's skills to shake out," says Lane. He believes the business should require any children who think they might want to take over the family business to work in low-level jobs for the company while they are in high school, then work somewhere else for three to five years after college in order to gain experience in the real world.

Part of the emotional upheaval in the succession process, of course, can also stem from concerns about who has the best skills. It is not uncommon, says Lane, that when a business hits revenues of $300 million to $400 million, it begins to outstrip the resumes of many family members. "At that point, the children should have to submit their resumes just like anyone else," he says. "The decisions as to who will manage the company have to shift to the board. It has to be a matter of who will contribute the most to shareholder value."

Ira Tatelbaum, founder of the family business-consulting firm BP Solutions in Boston, says that while he specializes in drawing up buy and sell agreements and structuring the post-succession business, he generally brings a psychologist to the meetings. "We've had great success in taking the emotions out of the succession discussions," he says. "A lot of family issues will surface. Sometimes I'm relatively quiet at these meetings where they're talking about power and money." Often the way to achieve an equitable distribution is to make children who are not involved in the business active as partners in the family office instead, overseeing other family ventures such as philanthropy. Tatelbaum also stresses that to avoid any questions of bias, the firm insists that it be paid by the family-owned company, not by individual family members.

The Transition
Among Grant's clients is a family that, she says, has set up an ideal model of family business governance. The business is now in the hands of "generation two," which encompasses ten siblings and cousins, only two of whom are running the business. "The others do everything from bookkeeping to surfing," she says. "But they all get together for a family meeting once a year. There, those who run the business present a completely transparent picture of everything: the salaries they pay themselves, the distribution to the others and the five- to ten-year plan. They're also starting to talk about their plans for generation three."

Not all families get along so well, of course. And in addition to family members, the heirs of the business will have to answer to their employees, their board and their customers. "If only one of the children assumes control of the company, the structure of the business may remain the same as it was when the parent was in control," says Mezzullo. "But if more than one child is active in the business, the dynamics will change dramatically. The potential for discord will be elevated dramatically."