Rosenfarb LLC
Family Feud

Money often tests a family’s unity and trust.  Typically at issue is the misuse of a significant family possession – such as a business, an estate, a trust, or an inheritance.  Those tested, should be ready to feud using financial facts.  Armed with financial facts, a family feud could be easily resolved.

Feud resolution begins with using financial dialect to ask focused questions.  Responsive to focused questions should be relevant financial documents, which should be organized and reviewed.  Gleaned from financial documents should be potent financial data to identify misuse of the family possession.  Following this “family feud formula” of Dialect->Documents->Data, any family member can become and remain vigilant about the family’s money.

Dialect

Financial dialect is typically used to identify what a family owns and owes, and how much the family “brings in” and “takes out.”

What is owned could be

  • cash,
  • accounts receivable (amounts due from customers),
  • investments (stocks, bonds, and other investments by, say, a business or an estate),
  • plant, property, and equipment – also known as fixed assets (things such as buildings, cars, and machinery), and
  • intangibles (things like patents, trademarks, copyrights, trade secrets)

What is owed could be

  • accounts payable (amounts due to vendors), and
  • notes, loans, and debt (amounts due this year, or in the future, to banks or wealthy individual lenders, such as family)

The difference between what is owned and what is owed is referred to as the “value” of the misused family possession. The family’s accountant may erroneously refer to this difference as “equity” or “capital” – but the family member should recognize that the “value” of a family possession is often greater than the “capital” or “equity” a family’s accountant indicates on a “balance sheet” or a “statement of financial position.”  Such accounting reports often contain the amounts the family paid many years ago – not the amount someone would buy it for today.

What the family “brings in” could be

  • receipts from sales of products or services,
  • receipts from renting real estate,
  • receipts from interest-bearing bank or investment accounts,
  • receipts from selling investments at a profit,
  • receipts from renting intellectual property (such as patents) to others – typically called “royalties,”
  • receipt of gifts to the family,
  • receipt of IRS and other tax refunds, and
  • amounts loaned to the family

 

What the family “takes out” could be

  • payments for goods and services,
  • payments for maintaining real estate,
  • amounts deposited in interest-bearing bank and investment accounts,
  • payments to register, develop, maintain, and defend intellectual property,
  • amounts gifted by the family,
  • payments of income, payroll, sales, and other types of tax, and
  • repayments of amounts loaned to the family, and related interest

 

The difference between what the family “brings in” and “takes out” – typically the available cash flow – is often measured in different ways, and sometimes confused with yet even more measures of “profit” (such as “gross profit,” “operating income,” earnings before interest, taxes, depreciation, and amortization or “EBITDA”), but should always exclude any amounts inappropriate, non-business, or otherwise not authorized by the family.

Armed with financial dialect, developing focused questions typically about the following – becomes easy and effective:

  • value of the possession,
  • activities of the possession,
  • control of the possession,
  • past or planned changes to the possession,
  • and transfers of a family possession.

 

Documents

Responsive to such focused questions would be financial documents such as accounting and tax, and documents “telling the story” of how a possession was formed, bought, made, changed, or transferred.

Typical accounting records include

  • financial statements (which may be audited, reviewed, or compiled by an independent CPA), and
  • accounting reports (such as a chart of accounts a general ledger, a list of journal entries, and a cash receipts and cash disbursements journal).

Typical tax records include

  • income tax returns (which depending on the legal structure of the family possession could be IRS Form 1120, 1120S, 1065, or 1041 and their state and local equivalents)
  • payroll tax returns and other payroll forms (including IRS Forms 941, 940 and their state equivalents, and IRS Forms W-3, W-2, 1096, and 1099),
  • state sales and use tax returns, and
  • gift tax returns and employee benefit plan reports (IRS Forms 709 and 5500)

 

Data

By reviewing such financial documents, it is usually easy to glean financial data evidencing misuse of a family possession.  Such financial data may be

  • amounts unequitably benefitting family members,
  • amounts benefitting individuals not authorized by the family, and
  • mismanagement of a family possession, and
  • reduction in value of a family possession.

If you or your client is experiencing a family feud, give us a call and let’s apply the “family feud formula” of

Dialect->Documents->Data.