With the change in administrations, we are again faced with a new group of leaders who will set policy that will greatly affect the continuation of a family-owned business. If you own a family business, chances are you expect your children to eventually succeed you in owning and running it.
As a parent, you probably want your estate divided among your children as equally as possible upon your death. But what happens if not all of your children are active in the company? It makes sense to leave the business to the child or children who are capable of managing the business successfully in the future. That leaves you with a big challenge: how to balance the distribution of your assets so your other children get their fair shares. One obvious solution would be to leave non-business assets of equal value to the children who are uninvolved in the company. But if the family business comprises the bulk of your estate, there won’t be enough assets outside of the business to give everyone an equal share, especially after paying estate taxes.
There are a number of planning techniques that you can use to equalize inheritances among your children.
Life Insurance. By purchasing life insurance, you can provide a ready source of cash to buy assets from, or make loans to, the estate and provide for those children who won’t inherit the business. Placing the insurance in an irrevocable life insurance trust can keep the proceeds out of your taxable estate, if the trust is properly structured. The trustee could then be directed to distribute cash from the trust to the children who are inactive in the business.
Buy-Sell Agreements. Another way to raise cash is to arrange for the sale of a part of your business in the event of your death or disability. By setting up buy-sell agreements funded by life and disability insurance, you can take away a lot the worry before the health problems cause you to leave the business prematurely.
Leasing Business Assets. Another strategy is to leave real estate or other business property to the children who don’t participate in the company. The rental stream from the lease provides the cash to balance out the inheritances among the children. Generally, the lease should be signed when preparing your estate plan and be sure to set the rent at fair market value without putting undue stress on the kids still running the company.
Providing Equity. By giving a part of the company to your children who aren’t involved with it, but limiting their power, you can also equalize values. For instance, you can give them non-voting, dividend-paying preferred stock, non-voting common stock, limited partnership interests, or other equity interests. Unfortunately, you will also be exposing them to the risks of the business. You will need to discuss this with an insurance professional to purchase the proper liability insurance to reduce the risk.
Providing equally for your children is never an easy task, especially when your primary asset is the family business. The child or children who will receive the business seemingly have a favored position. But by reviewing the various options with your insurance and tax advisors, you can design an equitable arrangement for all your children. iBi