Passing the Family Business to Your Kids Isn’t Simple

Finding a way to hand-off your family business to your kids without stirring up family discord isn’t easy.

If you have 3 children, equal joint ownership of the family business may not work well if only one child works in the business.

Why? The child toiling away in the business could decide to pay himself or herself a handsome salary, which would cut down on the company’s net income available for sharing with his sibling co-owners. As an alternative to the hefty salary, or in addition to the hefty salary, the child working in the business may declare that the rest of the company’s earnings are needed by the company for existing and future business needs. That path could freeze the sibling co-owners out of receiving any part of the business proceeds, which is almost certain to lead to a fight.

Or, perhaps from the outset, the siblings who do not work in the family business want to sell the family business so as to receive cash now, whereas the child working in the business depends on the business for his or her livelihood.

A second option taken by some parents is to gift the entire business to the child working in the business and to provide other assets – perhaps life insurance proceeds – to the other children.

This option can be tricky also because there may not be sufficient other assets for the other children, the parents may be “uninsurable” or the insurance may be too expensive. And, the value of the business could change dramatically between the implementation of this plan and the parents’ death, which would create an imbalance in your distribution plans.

A third, more prudent, option may be for you to divide your assets equally but build in some rules.  (Children tend to equate “equal” treatment in your estate plan with “equal” love for them. When it’s not equal, one or more feel hurt.)

The extra rules could include provisions that the share of the child who is working in the business is met entirely with business assets. In the event that his or her siblings also end up with some business assets — because the business assets represent such a large share of your estate — provisions could be added that the family business child is to buy out his or her siblings over time.  Your estate plan may also want to specify how the purchase price of the siblings’ shares will be determined, so as to avoid disputes over the purchase price.

An estate planning attorney can help you work out a plan that seeks to be fair to all of your children.

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Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305         952-649-9771