I Want to Pass My Business to My Kids — But They’re Not All Interested
One of the most common and emotionally complex succession planning challenges arises when a business owner wants to pass the business to their children but the children have different levels of interest, ability, or desire to participate. Some may be actively involved in the business; others may have chosen entirely different careers. Treating children equally and treating them fairly are not the same thing when a business is involved, and the planning choices made now have lasting consequences for both family relationships and business continuity.
Equal vs. Equitable
Many parents default to equal distribution — giving each child the same ownership percentage in the business. This is emotionally intuitive but can create significant practical problems. A child who has no interest in the business and receives a twenty-five percent ownership interest may want liquidity — a buyout — at the worst possible time for the business. Children who are actively running the business may find themselves subject to governance rights held by siblings who have no operational knowledge or alignment with business decisions.
An equitable distribution may look different from an equal one. One approach is to separate economic interests from governance rights — giving all children a share of the business’s value but concentrating management and voting authority in the children who are actually running the business. Another is to use other estate assets to compensate non-participating children, leaving the business to those who are involved. Each approach has different tax, legal, and family dynamics implications.
Structuring the Transfer
Business transfers to the next generation can take various forms. A gifting program — transferring ownership interests gradually over time — can use the annual gift tax exclusion and potentially take advantage of minority interest discounts in valuing the transferred interests. A sale to the next generation — sometimes structured as an installment sale or a sale to an intentionally defective grantor trust — can provide the owner with retirement income while transferring appreciation out of the estate. Note that tax planning in connection with these transfers should be done in consultation with a tax professional and estate planning attorney.
The Buyout of Non-Participating Children
In some families, the cleanest solution is to transfer the business to the children who want it and provide other assets — life insurance proceeds, other investments, real estate — to the children who do not. This requires that the estate has sufficient non-business assets to equalize distributions, or that the business-owning children agree to buy out their siblings over time.
A buy-sell mechanism built into the governing documents can address this explicitly — giving non-participating heirs a right to sell their interest to the active owners on defined terms, or giving active owners a right to purchase non-participating heirs’ interests.
Business owners considering how to pass their business to the next generation should consult with a business attorney and an estate planning attorney to evaluate what structure best fits their family situation, their business, and their overall estate plan. For related topics, see our page on succession planning and our post on family LLCs.
Business owners considering how to pass their business to the next generation are welcome to schedule a consultation with Russo Law LLC to evaluate what structure best fits their family situation and overall estate plan.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This corporate lawyer blog post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey. It may not reflect laws in other jurisdictions.
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