Let’s be honest, not every child is looking to own or run the family business. Many children would be happier to receive a lump sum of money and be done with it. Not surprisingly, clients are often looking for advice on how to avoid a family squabble when one child wants to own/run the business and another wants to sell their interest and obtain cash.
One basic approach to this issue is to structure the gifts to the children differently. By utilizing appropriate funding mechanisms (such as insurance or an existing investment account), a parent can leave a monetary gift to one child while leaving an ownership interest to the other child. Be aware, however, that some parents have begun this process only to determine that a child fully expected to have a continuing ownership interest in the family business even though they did not plan on running that business. Accordingly, it is important to sit down with your children before entering into this type of planning and make sure you are clear about their goals.
Another, more flexible approach would be to set up a Buy/Sell Agreement between the owners (even if you are currently the sole owner) that sets up rules for the sale of your ownership interests in the business. The benefits to this type of plan is that it allows the children some flexibility in the future. If one child determines (sooner or later) that they do not want to be a business owner then the rules for sale of their interest are already in place. For instance, a Buy/Sell Agreement can require a child to offer their shares to their siblings first before selling to an outside party. A Buy/Sell Agreement can also require the selling child to include their siblings in any sale of the shares to avoid the temptation for one child to rush to the market for the best share price.
Still another approach might call for placing the ownership interests in trust to be managed by a designated trustee. In short, they key is to identify your goals and concerns early, communicate those your goals and concerns to your children and estate planning attorney, and put together a plan that matches your goals with your business and your children.
Royce Lanning
Phone: 281-367-1222
Fax: 281-210-1361