Call us on

Dividing Your Family Fortune In The United States

  Sanjiv Gupta CPA  Published 
Dividing Your Family Fortune In The United States

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 are not involved in the business decision to give up their stake.

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

  • Triggering events—these pertain 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 agreements that you and your heirlooms can enter into—mandatory and optional buy-out. In a 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 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 to 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 opportunities 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 the 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 has solid experiences in succession planning.

Unexpected life events should not only be the reason for you to start planning about the 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.