Mar 17

Treating the Children who are Involved in the Business and those who are not, Equally

shutterstock_325982429Your business is thriving. You have a strong management team to whom you can delegate decisions you had been making yourself for years. You take off every Thursday to play golf or to watch your grandchildren. ‎ You are thinking about taking off more time … maybe even “getting out” and letting your managers run the business. Maybe you are considering transferring stock or other equity to your children so you do not have to worry about volatile business cycles impacting on your retirement.  You are talking to your estates lawyer about your will and are confronting the transfer of the business there too.

Problem is, two of your children work in the business, maybe are even part of the management team, and the other two are not. But you want to treat your children equally in terms of making gifts and providing support during life and making sure the children (and their respective children) share equally in your estate at death. Business interests make the goal of equality a challenge.

One solution is to give the business to the “involved” children and leave other assets to the “uninvolved” children.  Life insurance can make up the difference if there are insufficient other assets to “make up the difference.”  But this solution is far from full-proof. For instance:

  • How do you determine the value of the business?
  • What if there are not sufficient other assets and the business owner is uninsurable or insurance is too expensive?
  • What if the business thrives beyond expectations after a gift to the involved child or after the business owner’s death? Will the uninvolved child feel cheated?  Will the involved child who helped build and grow the business feel under-compensated?
  • What if the business fails during that period? How will everyone feel then?

The solutions to these problems are as numerous as the problems themselves.

One solution is, of course, trusts.  (I am, after all, a trusts and estates lawyer!)

The business owner, during life and/or at death, creates trusts to own the business. One trust is created for the benefit of each child and the trust lasts for the child’s lifetime. At the child’s death the trust passes to the child’s children, or if not, is added to the other children’s trusts.

A trustee is appointed for each trust and, in addition, a “special business trustee” is appointed to address all issues related to the operation, management and disposition of the business and the stock or other equity in the business. The special business trustee can be one or more of the involved children.

Under this plan the business passes equally to the children but because of the trustee arrangement the involved children have control.

If the business does well — “all ships” rise” so to speak.
If the business does not do well — the children commiserate, but because under this plan non-business assets pass to all children there is a cushion.

Like all business solutions, this one applies only to certain business owners and only to certain situations. The trust agreements can be written to address particular concerns such as by requiring a majority (or super-majority) of all children (involved and uninvolved) to vote on a proposed sale or a major acquisition by the business.

The take-away is that these matters must be considered and discussed with family, management, consultants, accountants and counsel and an appropriate plan put in place so that the business continues to grow and thrive and the children all share in the benefit.





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Business Succession

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