Dividing Your Family Fortune In The United States

Dividing Your Family Fortune In The United States

Dividing Your Business Fairly Among Your Children

You’ve done well in your life. You’ve had a successful career as an entrepreneur and built up a business that you can pass on to your kids. After spending much time and energy to build up your company, you naturally want the firm to outlive you and become more successful in the future. So you count on your children to continue your legacy.

But your problem is this—only one of your children is involved in your company. The others have shown no interest at all in your business, or have gone to different career paths. So how do you prepare your estate plan, knowing that more than half of your fortune (if not all) is tied up with your business?

There are many factors you will have to weigh in as you contemplate your estate plan. One  is that there is your desire for the company to live beyond your life. After all, it was you who built up the firm. Would that mean that the child who’s now involved in the business gets a lion’s share of your estate?

On the other side of the fence, your plan to give a majority of your wealth to the child involved in the family business would likely hurt your other children. As a parent, the last thing you want to happen is for your family to fall apart because of disagreements in dividing the family fortune.

First of all, you should realize that your predicament isn’t uncommon. In fact, this is one of a more typical problems facing families that own or operate a business. Passing on a family business can get really tricky when not all the children are working in the company.

In estate planning for a business owner, equal distribution of wealth may not always be fair. It’s a given that most parents will try to be generous, so they’ll think that the fair way of distributing wealth among their children is to divide the fortune equally among the siblings.

But that isn’t fair at all to the child (or even spouse) who is involved in a company, much more to one who has helped tremendously in growing it. The child may feel resentment toward his siblings who had nothing to do with the business but end up getting lots money from it.

There are three options that you may want to explore if you want to distribute your wealth to your children fairly. These are:

Life insurance

Life insurance is considered by some experts as the most tax-efficient way of leaving wealth to children since all life insurance proceeds are received tax-free by the beneficiaries. It is also an effective way of equalizing the wealth distribution in your family especially when only one or two children are involved in the family business.

Since the child who’s involved with the family business is likely to take over from you as the owner or majority shareholder of the company, it would be practical to name the child or children not involved in the company as the beneficiary.

But there are some downsides to doing

Tax Planning with Sanjiv Gupta CPA

Tax Planning with Sanjiv Gupta CPA

this strategy.  There’s the risk that the child involved in the business may feel that he or she is not getting a fair share. The child may be taking over as the company head honcho, but the fact remains that he has to maintain and nurture the business. On the other hand, the other children will simply have to invest the money you left them in a bank or brokerage account.

You’ll also have to determine how much insurance to buy. It’s tricky, to say the least. Your company may be worth a few million dollars today but it could double its value by the time the insurance policy pays out.

Buy-sell Agreement

Another way, albeit more complicated, is to have a buy-sell agreement to the interested child, or the one who is involved, willing and capable of taking over the family business.

A buy-sell agreement can be an integral part of your estate planning, especially if you have children that are not heavily involved in your family business.  In this scenario, you can equally divide the shares of the business among your children but give some privilege to the one who’s been helping you in the company.  It could be the win-win solution to your estate planning woes.

A buy-sell agreement can put limitations on the future sale or transfer of the business. This would minimize, if not completely eliminate, any chances that your business would be transferred or acquired by other people or those who aren’t part of your family. This can also give your child involved in the business the first right to buy the shares owned by his/her siblings.

Think of a buy-sell agreement as a prenup. The document can stave off a lot of  problems that can potentially destroy your family. It would prevent conflicts within your family, particularly your children.

A buy-sell agreement clearly establishes procedures that must be followed in case that you, as the business owner, becomes disabled or dies. It would establish the price and terms of a buyout, in case the children who are not involved in the business decide to give up their stake.

Buy-sell agreements often take into consideration the following issues:

  • Triggering events—these pertains to events that trigger the provisions of the agreement, such as the death of the business owner, divorce, and retirement.
  • Business valuation—this sets the value of shares to be transferred.
  • Buyout terms—buyout terms usually favor the buyer, in this case, the child who is involved in the business. That means lower down payments, interest rates, and even longer buyout periods.
  • Funding—this determines how the departing owner will be paid. Funding may be obtained through insurance coverage such as life, disability and business continuation insurance.  Others opt for installment purchases dependent on cash flow, or through savings generated in a sinking fund.

There are two kinds of buy-sell agreement that you and your heirlooms can enter into—mandatory and optional buy-out. In mandatory buy-sell agreement, the child who is involved in the business will be obligated to purchase your shares in the company when you die. Funding could come from the options mentioned earlier. This is the more recommended type of buy-sell agreement because you can be assured that your business stays within the company once you are gone.

But if the buy-sell agreement is optional, there should be a right of first refusal to prevent your children from transferring their shares to a third party without offering these first to the son or daughter involved in the business. This would prevent them from selling their stakes in your company to other people, or those who are outside of your family.

Since the son or daughter who is involved in the family business appears to be favored in a buy-sell agreement, there’s one way for you to balance things out, so to speak. You can leave your other personal assets to the other children who are not involved in the business. For example, you can name them as primary beneficiaries of your home to make up for the fact that you are basically leaving your business to your son or daughter who is working for your company.

Giving the Business to All Your Children

If neither of those two options appeals to you, then you could just leave your business to all your children. If you have two children, you can give 51 percent to the child who is involved in the business. The other child gets the other 49 percent. Then you can make a writing or agreement that the child with who’s involved in the business will buy his/her sibling’s shares at a predetermined time.

There are pros and cons in this arrangement.

One major advantage of this arrangement is that you won’t have to take any cash out of your business to pay for the life insurance premiums which would later be used by the child involved in the company in buying your share.  This means that your company will have more opportunity to grow as it won’t have to allocate part of its income in paying for rather expensive life insurance policies.

Another advantage is that the child who’s not working in the company won’t feel left out with the way you divided the shares. It’s unlikely for the child to feel slighted with the way you divided the shares especially if you make him/her understand that the higher percentage of shares is a reward for the other sibling who has been helping out the company.

However, a disadvantage of this agreement is that your children are hitched together. If the child who gets the majority of the shares screws up or fails to keep the business profitable, then the other child will have to pay the price as well.  You could also argue that the child who has majority stake has undue pressure to perform because the fortunes of his siblings depend on him.

If this doesn’t sound appealing to you, you might even want to ask your children about how you can divide your business fairly. The child who’s involved in the business may even ask his sibling to do some consulting work for the company just to even things out.

Planning Ahead

Regardless of the arrangement you eventually decide to adapt in dividing your business assets to your children, you should plan now how you will be transferring your wealth to your family members.  Doing so would spare your children a lot of worries by the time that you have to leave the company due to disability and even death.

This underlines the need to plan your timeline for the transfer of your wealth. By planning early on, you will be able to divide your fortunes fairly to your children. It can prevent any animosity amongst your kin, especially when there is one child who is heavily involved in the operations of your business. You want to reward him/her for helping you out but not in a way that would offend his/her siblings, right?

There are several things that you need to ask yourself in planning your estate:

  1. How long do you think you will work?
  2. What are your sources of income once you retire?
  3. Do you want to continue working for the business if you have given up your position/retired?
  4. Do you prefer a traditional, leisurely retirement; one which you are no longer involved in the final decision-making in your company?

By answering these questions, you can have a better perspective of your overall financial situation and estate plan. You can then work out an estate plan that would be in sync with your goals as well as those of your kin.

Once you have made up your mind on when to divide your estate fairly among your children, look for a financial planner and an attorney who have solid experiences in succession planning.

Unexpected life events should not only be the reason for you to start planning about succession and distribution of your wealth. Planning early also means that you and your family will have more time for in-depth conversations, so you can respond to the concerns of your children and spouse.

The pros like the financial planner and attorney can give you sound advice on how to deal with the concerns of your family members. They will also be there to support you through the various legal and documentary requirements needed in distributing wealth to your children.

The most important part is to open your communication lines with your family, especially your children. Keep the conversation healthy by sticking to the issue at hand. You must also deal with any emotions such as feelings of insecurity and jealousy by speaking to each child, if you think you must.

The bottom line is that by planning your succession early on and having this communicated with your children, you can look forward to a future wherein your business flourishes and no cracks whatsoever on the foundation of your family.

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