Dynasty Disasters – Intergenerational Wealth

The Pitfalls of Intergenerational Wealth & Business Management

Running an intergenerational family-owned company can be very challenging. How do you balance present family and lifestyle goals, with operating a successful and growing company? How do you choose what is best for the family and its individual members, while also considering the future and thinking ahead to the next generation of the business?

While some family business dynasties such as the Mars Candy company and the descendants of William Randolph Hearst continue to thrive, other dynasties have crumbled. Frances Stroh was born an heiress to one of the largest beer companies in America, Stroh Brewery Company. In her new book “Beer Money: A Memoir of Privilege and Loss” she writes about her wealthy family’s downward spiral leading to the loss of their approximately 130 year brewing legacy. Ms. Stroh documents the missteps an intergenerational family-run company can make which could result in its collapse.

In a New York Times article discussing Ms. Stroh’s book, they highlight some of the unique issues that arise in intergenerational wealth and business management. For instance, in the Stroh family they chose successors of business management positions along patriarchal family lines. Instead of including women family members and outside talent, they assumed male heirs would automatically be talented and qualified in running the business.

As the Stroh family multiplied, many of the heirs relied on large annual dividends to support lavish lifestyles. Even when business profits dwindled, the dividends to heirs continued, resulting in company principle being drained.

Struggles within the nuclear family also contributed to the collapse of Stroh Brewery Company. Ms. Stroh recalled her father’s alcoholism and her brother’s drug addiction, coupled with the stress of losing the family business, causing her immediate family to unravel.

To read more about the Stroh’s struggle with intergenerational wealth management see the New York Times article.

Learn more about Frances Stroh’s book here.

“Not So Fast” – Federal Judge Grants Injunction Against Overtime Regulation

Rule Expanding Overtime Halted by Federal Judge

On Tuesday, November 22, a Federal District Court Judge in Texas granted a nationwide preliminary injunction against an Obama administration regulation, which sought to expand the eligibility of millions of workers for overtime pay.

The regulation was ruled by Judge Mazzat to have likely exceeded the authority of the Obama administration because it nearly doubled the overtime salary threshold. The regulation would raise the minimum annual salary amount from $23,660 to $47,476. It would automatically qualify workers for overtime pay, so long as their annual salary was below the new $47,476 threshold.

Twenty-one states and over fifty business organizations have backed the request for an injunction to delay the regulation’s effective date of December 1, 2016, until the judge could make a final ruling based on the merits.

Small business owners and business organizations applauded the decision, arguing that the regulation would substantially burden business owners with increased labor costs. The Labor Department and worker advocacy groups argue that by blocking the regulation, workers who already put in 40 hours a week will continue to work longer hours for unfair pay.

Many employers have been making plans for the effective date of the new regulations, which is now just eight days away. Employers may have already notified employees about their new pay arrangements. Should employers reverse those salary decisions and postpone their implementation? There are many unknowns at play, not the least of which is that the Trump administration will take over responsibility for this litigation in January 2017. Might a Trump administration concede this case, and let an injunction remain in place?  That is a possibility. Might the new administration have the Department of Labor issue new regulations extending the date for implementation of the new salary/overtime rules? That’s also possible. One other possibility is an appeal and a higher court vacating the injunction. In that case, could the December 1, 2016 effective date be made enforceable retroactively?

Each employer must make a business decision about what is appropriate for their workforce, and determine how much risk (given the uncertainty) they are willing to accept. One important point for employers – adjustments to compensation terms can be made prospectively, but it is dangerous for an employer to retroactively modify an employee’s compensation, particularly if the modification is to reduce pay. An employer and employee have a contractual relationship, with many applicable state and federal regulations. Employers should be cautious about any course of action that could be seen as a breach of the employment contract, or a violation of state or federal laws.

For more information, read this article from Bloomberg.

Bitcoin – Is It Really Money?

Florida court dismisses money-laundering case, saying that bitcoin is not money.

Recently, a Florida judge dismissed a money laundering charge against a man who sold $2,000 worth of bitcoin to an undercover agent. The agent claimed he was using the bitcoin to purchase stolen credit card numbers. The judge held that the digital currency is not money. Therefore, it does not fall within Florida’s money laundering statute. The judge stated that trying to regulate bitcoin using a statutory scheme regulating money is “like fitting a square peg in a round hole.” This leaves the door wide open for the Florida legislature to regulate bitcoin and other virtual currency.

Bitcoin was released in 2009. Since that time, courts and legislatures have struggled to fit it into existing legal framework. There are few laws or regulations specifically governing bitcoin and its price fluctuates widely. One expert witness compared bitcoin to “poker chips that people are willing to buy from you” (this expert was paid in bitcoin to appear as a defense witness). The currency isn’t printed, like the euro or the U.S. dollar. The IRS considers bitcoin to be property, as opposed to currency, so any exchanges are deemed to be bartering exchanges. New York now requires “BitLicenses”. They are needed for any businesses that buy, sell, or process bitcoin in the state. New York institutes a multitude of consumer and fraud protections on the businesses. Most notably, the business will have to maintain records of their customers’ names and addresses. This eliminates the anonymity that made bitcoin so appealing in the first place.

It is not just the US that struggles to define bitcoin. In Australia, bitcoin is double taxed. That is because in the country it is considered to be a commodity, not a currency. There is a 10% tax when consumers purchase the currency. They are taxed again when consumers use the bitcoin to purchase goods. Bitcoin is exempt from value-added tax (VAT) in many European countries, indicating that they do not see it as a good but instead as a legitimate currency. In Switzerland, the city of Zug is allowing citizens to pay for public services using virtual currency.

While the trend certainly seems to be towards treating bitcoin as currency, there is still plenty of uncertainty as to what its future will look like. The Florida case may have set precedent for how the rest of the United States will treat virtual currency. It may also encourage legislators to create more laws regulating bitcoin. Only time will tell.

Due Diligence: Just Who Are You Dealing With?

DO YOU KNOW WHO YOU’RE DEALING WITH?

Due Diligence Before You Enter Into An Agreement

I’ve represented a number of clients over the years who failed to perform any due diligence with regard to the party they were contracting with before they entered into the contract. Had they performed some quick and easy due diligence before they signed the contract, they would have saved themselves a lot of headaches, hassles, and money.

Before you enter into a contract and obligate yourself to do something, take some time to learn about the other party. If you are entering into an agreement with a business entity (e.g. corporation, LLC), check the Secretary of State/Corporation Division website to learn about the entity. You’ll be surprised the number of situations I’ve seen where clients entered into contracts with defunct or non-registered entities. Find out who the principals of the entity are. The Oregon Secretary of State website enables you to do a business search by individual– whereby you learn of the businesses (active and inactive) for which an individual has been an owner or corporate officer. Red flags include individuals who started numerous businesses in the past and businesses that fail to file annual reports and pay annual fees.

If the person or entity with whom you’re negotiating provides services which requires a license or registration (i.e. contractor, realtor, medical professional, etc.), you should be able to search on-line records regarding their licensing history and complaints. Red flags include numerous complaints, suspensions, or an inactive license/registration.

If you are contracting to perform work on real property, perform research with regard to the ownership of the real property (after obtaining a good address for the property) to determine who  owns the property and who has authority to allow work to be performed on the property. If you cannot locate on-line information with regard to the subject property, contact a local title company and ask for a trio or list-pack for the property.

In light of the amount of information available on the internet these days, you should also consider doing a Google or Bing search with respect to the potential new client and/or their principals. You might be surprised as to the amount of information available about them on the internet.

Your time is valuable. You don’t need to be dealing with individuals or entities who have bad intentions or who are deceptive. You’re probably better off taking a vacation to the beach or the mountains than you are dealing with unscrupulous people. Take some time to learn about the party with whom you will be dealing before you obligate yourself or your company. You may find out that they aren’t who they claim to be. Such time is time well spent. The time spent performing due diligence before you enter into the contract could be as important as the time spent fulfilling your obligations under the contract. As the old Benjamin Franklin quote goes, “an ounce of prevention is worth a pound of cure.”