How to Leave the Family Business

I was working with a Dallas couple this week. They had five children; two of them worked in their business and the other three children did not. They were very sensitive to the fact that the two sons "in the business" should inherit the business when Mom and Dad pass away.

The mother, in particular, was emotional about wanting to set up an estate planning legal program that was "fair" to all of their five children. The couple knew that their business was valuable, and Mom felt that if they left the business to the two children who were in the business, and left everything else to the other three children, then that would not be "fair" because the children getting the business would be getting significantly more than their other three children. 

They did not want to short change their other three children simply because those three children were not suited to work in the family business. One solution Dad had already created was to purchase life insurance that would go to the three children who were not in the business. But still, the life insurance death proceeds would not be enough to "compensate" the other three children for not getting any of the business value.

We discussed a number of alternatives. One of the alternatives we discussed was to structure the ownership of the business so that after Mom and Dad died, the business (it's actually three businesses) would be in a trust. The two children in the business would continue working in the business and would continue to collect salaries. However, when the business would later sell, the sales proceeds of the business would be shared by all five children.

This alternative seemed to resonate with the parents as a way to fairly provide for the transition of their business to the next generation while being fair to each of their five children. This arrangement can be tricky and we are still working out the details.

If you own a business and want to make sure that it passes to the right people the right way, you may want to give us a call and schedule a time to discuss your alternatives so that you can leave a legacy rather than leave some massive headaches to your loved ones.